UPDATE 2-HK Electric IPO falls flat as investors snub third Li Ka-shing deal
* HK Electric closes down 2 pct despite low-end pricing
* Tepid retail demand contrasts with buoyant IPO market
* Weak performance adds to previous Li's IPO disappointments (Adds comments, details on purchase by Li-controlled units)
HONG KONG, Jan 29 (Reuters) - HK Electric Investments Ltd , a trust spun out of Li Ka-shing's business empire, fell 2 percent on its trading debut as Hong Kong investors spurned a safe-haven utility ahead of juicier growth stocks set to come to market later this year.
The weak opening came after a $3.1 billion initial public offering, the biggest in Asia excluding Japan since late 2012, that had to be priced at rock-bottom to get off the ground. An offer of a bond-like high yield wasn't enough to pull in buyers: trust assets like HK Electric have been dumped as the market eyes higher interest rates in the United States that will increase returns on other investments.
The billionaire's third listing disappointment in a row - the trust's units were down more than 4 percent at one stage - is in sharp contrast to a build-up in enthusiasm for Hong Kong IPOs this year, expected to be the city's best since 2010.
Among big-ticket deals expected to be launched in Hong Kong this year are a $2 billion offer from Chinese carmaker BAIC Motor, backed by Daimler AG, and a $5 billion listing from Chinese meat processor WH Group, formerly known as Shuanghui International Holdings.
As the market savours those prospects, Hong Kong's real estate investment trust index has tumbled nearly 23 percent since late May 2013, when Fed Chairman Ben Bernanke indicated the central bank would gradually decrease a bond-buying programme, likely preceding higher interest rates.
Following underwhelming performances at two other Li companies listed in 2011, HK Electric's weak start means Asia's richest man has yet to dispel a reputation among the city's investors for selling out of his businesses at the peak of their value.
The setback comes as the 85-year-old reviews strategy options for his A.S. Watson Co Ltd business, including a possible listing later this year valuing the retailer at about $23 billion.
The HK Electric IPO had already been slashed by nearly a third from the original maximum target last December, as investors indicated their reluctance to pay a top-dollar price for a defensive investment in the regulated, low-growth environment of the utility sector.
"The point is people expect interest rates will increase soon in the U.S. market, so 7 percent is not very attractive," said Alvin Cheung, associate director at Prudential Brokerage in Hong Kong, in reference to the yield HK Electric is paying on the trust.
"You can find the track record of Li Ka-shing IPOs and lots of them are below the offering price," Cheung said. "The price was set a bit high, over their value."
HK Electric, which was spun off from Power Assets Holdings Ltd, fell as low as HK$5.23 before closing at HK$5.34, 2 percent below an IPO price of HK$5.45 per unit. The benchmark Hang Seng index closed up 0.8 percent.
WEAK RETAIL DEMAND
Though anchored at the very bottom of its marketing range, the IPO's retail portion generated only 7.5 times more orders than the shares on offer - a comparatively tiny oversubscription rate for Hong Kong. The $2.8 billion listing of Chinese bad debt manager China Cinda Asset Management Co Ltd in December had its retail tranche more than 161 times oversubscribed.
The institutional tranche of the IPO was "moderately over-subscribed," a company filing showed on Tuesday.
Subsidiaries of Cheung Kong Infrastructure Holdings Ltd. (CKI), which is controlled by Li, stepped in to buy nearly 300 million units in the IPO as part of a "preferential offering" for Power Assets shareholders, according to a securities filing.
CKI purchased 90.7 million units in addition to its entitlement, in a sign that some other existing shareholders of Power Assets decided not to take up their allotment in the HK Electric deal.
Canning Fok, chairman of HK Electric Investments and Power Assets and Li's right-hand man, said the company was "very pleased" with demand for the IPO, during its listing ceremony at the Hong Kong stock exchange.
The trust priced the IPO last week at HK$5.45 per unit, the bottom of a range of HK$5.45 to HK$6.30 each. HK Electric Investments offered 4.43 billion units for sale, raising far less than the maximum of $5.7 billion it was once seen raising.
At the IPO price, HK Electric is forecast to pay a 2014 distribution yield of 7.24 percent, according to the deal's prospectus.
HK Electric's downbeat debut is in sharp contrast to other small-sized offerings that generated strong support from Hong Kong's retail investors. Small investors swamped to smaller IPOs such as Honworld Group Ltd and night club operator Magnum Entertainment Group Holdings Ltd, with both IPOs generating over-subscription rates of more than 1,000 times the shares on offer.
With major economies picking up steam and companies chasing funds to tap into growth opportunities, advisory firm PwC estimates Hong Kong IPOs could raise $32.2 billion in 2014, the highest since 2010 and nearly double the 2013 tally of $17.1 billion.
Ten companies have already listed in Hong Kong so far this year, raising $3.5 billion, according to Thomson Reuters data.
Goldman Sachs and HSBC acted as sponsors and joint global coordinators of the IPO, with 10 other banks including Citigroup, Credit Agricole and Morgan Stanley also hired as co-lead managers.
The banks stand to earn as much as $93.3 million in fees for managing the IPO, equivalent to underwriting commissions and incentive fees of up to 3 percent.
(Additional reporting by Denny Thomas; Editing by Kenneth Maxwell)
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