* LME fees to rise from January 1 2015
* HKEx shares up 35 pct in 2014 on Shanghai stock connection
* HKEx sees legal fees up 87 pct from LME cases (Recasts, adds CEO quote, detail of rising legal fees)
By Lawrence White and Michelle Price
HONG KONG, Aug 6 Hong Kong Exchanges & Clearing Ltd (HKEx) will raise fees on the London Metal Exchange (LME) from Jan. 1 2015, HKEx said on Wednesday, as it battles costs from its acquisition of the LME and absorbs the London exchange's rising legal expenses.
HKEx, the world's largest listed stock market operator, will announce the fee increase in the fourth quarter of this year, Chief Executive Charles Li said at a press conference after HKEx reported a rise in second-quarter earnings.
"The market won't be happy but we told them from day one we would do this," Li said.
Li speculated at the media conference that the fee increase could be anywhere between 20 and 50 percent, before saying that he could not give any firm details. He previously mentioned a possible fee increase in February.
HKEx earlier reported that net profit rose to HK$1.19 billion ($153.55 million) in April-June from HK$1.17 billion a year earlier, better than analysts had expected.
HKEx bought the LME in 2012 for $2.2 billion, and has since seen profits suffer from costs associated with the acquisition and fees from the LME's legal battles.
Profit from HKEx's commodities business, which includes the LME, fell to HK$146 million from HK$252 million a year earlier on higher expenses, HKEx said.
HKEx's legal fees rose 87 percent compared with the previous year. Some $38 million of that $48 million increase arose from the LME's legal cases, HKEx said in its earnings statement.
"Those fees will continue for some time," HKEx Chief Financial Officer Paul Kennedy said at the media conference.
The LME faces a judicial review in Britain over an action brought by Russian aluminium company Rusal, and class actions in the United States alleging anti-competitive and monopolistic behaviour in the warehousing industry.
Shares in HKEx have surged 35 percent this year, compared with a 6 percent rise in the benchmark Hang Seng index, with investors betting that the proposed stock trading link between Hong Kong and Shanghai will boost trading volumes.
The surge in shares has made HKEx the world's biggest stock exchange by market capitalization. It is also the most expensive among global exchanges, trading at a 12-month forward price-to-earnings ratio of 34, the highest among the 94 stock exchanges covered by ThomsonReuters SmartEstimates data, which focus on recent forecasts by top rated analysts.
"Focusing on the (quarterly) results is probably moot given the transformational changes the exchange will experience from the fourth quarter onwards," Jefferies analyst Ming Tan wrote in a research note ahead of the results announcement.
Chief Executive Charles Li has long insisted that mutual market access between Hong Kong and mainland China is the exchange's best long-term growth plan.
Regulators, brokers and engineers in Hong Kong are racing to implement that initiative by October. The link will boost the average daily value of trading on the HKEx by around 38 percent to HK$93 billion ($12 billion) by 2015, according to BNP Paribas estimates.
HKEx's Li said lingering tax and rights problems that market participants feared might interfere with the launch of the initiative would be resolved "with certainty" ahead of the October deadline.
HKEx's share surge this year has some investors questioning how much further it can climb. The rally follows a tough 2013 for the exchange, when dwindling revenues from share trading and high costs from the LME acquisition dragged profits down.
"It's at times like that when you have to grit your teeth and buy. When things are more rosy like now you have to be sceptical," said Hugh Young, managing director at Aberdeen Asset Management Asia, which has over $551 billion in assets under management and owns shares in HKEx.
(1 US dollar = 7.7500 Hong Kong dollars) (Additional reporting by Tripti Kalro in BANGALORE; Editing by Michael Urquhart and Mark Potter)