Business Trusts Gain Fans in Hong Kong; Hong Kong is home to just two business trusts, a fraction of the 15 in Singapore

Oct 14, 2013

Business Trusts Gain Fans in Hong Kong

By Prudence Ho

Hong Kong is poised to take a big step forward as a destination for business-trust listings in the region, with an electricity company and a hotel operator aiming to raise up to US$6 billion before the year is out. So far, Hong Kong is home to just two business trusts, a fraction of the 15 in Singapore, the dominant regional market for such listings. But tycoon Li Ka-shing’s plan to carve out and list the Hong Kong electricity assets from Power Assets Holdings Ltd. in the city, if successful, could be the biggest initial public offering in Asia this year, according to Dealogic data.The IPO could raise up to US$5 billion, people familiar with the matter said earlier, eclipsing the 1.6 billion Singapore dollars (US$1.3 billion) raised via business-trust listings in Singapore so far this year.

Companies that establish trusts get a chunk of capital as they sell units in certain businesses, usually those that offer steady streams of income. They generally compensate investors by offering a guaranteed yield for a set period, funded by those cash flows.

“In Asia, there is a large number of family-controlled listed companies, and the founders value the ability to retain control but still want to monetize their assets,” said Vivian Lam, partner at law firm Paul Hastings. “Spinning off part of their operations as business trusts effectively achieves that.”

Billionaire Cheng Yu-Tung plans to raise up to US$1 billion in Hong Kong from a business-trust listing of hotel assets. In June, Mr. Cheng had scrapped a plan to list NW Hotel Investments because of market weakness. But now the company is again gauging investors’ interest, and the listing time frame hinges on market conditions, people familiar with the situation said

“Businesses in utilities, ports, infrastructure as well as commercial and industrial properties and telecom assets with steady income are suited to list through business trusts,” said Johnson Ngie, Deutsche Bank AG’s head of execution for Greater China.

Singapore has had special regulations for business trusts for almost 10 years, but Hong Kong doesn’t have a separate legal framework for business-trust listings. Instead, the territory introduced what is known as a share-stapled unit structure in 2011 following demand for nonreal-estate trust listings.

These stapled securities, which comprise units in the trust as well as shares in the company that holds the trusts’ underlying assets, are subject to Hong Kong’s regulations for securities, giving investors the same level of protection as shareholders of a listed company.

“There are no obstacles for listing business trusts in Hong Kong and we currently have no plans to introduce new listing rules governing the listing of business trusts,” said Hong Kong Exchanges & Clearing Ltd., the operator of the city’s stock exchange. The Securities and Futures Commission declined to comment.

Trusts are attractive to yield-hungry investors in a low-interest-rate environment such as now because they tend to pay steady and high dividends. But with the U.S. Federal Reserve potentially moving toward tapering its bond-buying program, which has held down interest rates, trusts could lose some allure.

Poor track records for some business trusts listed in Singapore and Hong Kong could also weigh on investors’ appetite. Of the three that have listed in Singapore this year, two are down from their IPO prices, while one is flat. Only two of the other 12 business trusts listed in the city have climbed so far this year. Hong Kong’s first business trust, HKT Trust, is down 5.6% this year, compared with the benchmark Hang Seng Index’s 2.5% rise.

Still, bankers say there are always investors who look for long-term yield. HKT, which raised US$1.2 billion in its 2011 IPO and is backed by telecommunications operatorPCCW Ltd., is up 58% from its listing price in 2011. PCCW, Hong Kong’s dominant fixed-line operator, is controlled by Richard Li, son of Li Ka-shing.

Hong Kong gained its second business-trust listing earlier this year, when Langham Hospitality Investments Ltd. listed in April. The trust, which is backed by real-estate conglomerate Great Eagle Holdings Ltd., raised US$550 million. Although Langham Hospitality comprises Great Eagle’s three hotels in Hong Kong, the company chose to list the assets in the form of a business trust rather than a real-estate investment trust.

Under Hong Kong’s laws, REITs must distribute at least 90% of their net income to investors as dividends, but there is no such requirement for business trusts. Similarly, a REIT can only borrow up to 45% of its total gross asset value, but there are no restrictions for business trusts.

Even so, there are 10 REITs listed in the city, five times the number of business trusts. Business-trust listings might be gathering pace in Hong Kong, but they have a ways to go in catching up.