The global pandemic has roiled financial markets worldwide, with equity indices having swung from one extreme to another over the past few months.
In times of shaky market performance, companies have historically been known to utilize share buybacks as a tool to minimize damage to their market capitalizations. Share buybacks, therefore, are a good indicator of internal company sentiment, as well as strategic direction, or lack thereof, going forward.
As the first half of 2020 has recently ended, we look back on share buybacks by Chinese companies to summarize emerging patterns in such activity.
Significant activity across the board on the Hong Kong Exchange
Most share buyback activity by Chinese companies has been coming from Hong-Kong listed entities, while those listed in the US have not engaged in significant similar actions.
Statistics from 36Kr revealed that as of June 17, six out of 35 Chinese listed companies worldwide, with a market value of more than USD 10 billion, have carried out buybacks, or announced an intention to effect a specific buyback plan.
For example, Xiaomi (HKG: 1810) has spent a total of RMB 457 million (USD 64.5 million) on share buybacks this year. Ping An’s (HKG: 2318) listed Hong Kong entity has also spent a total of RMB 5.9 billion (USD 83 million) on share buybacks in 2020.
Chinese companies with a smaller market capitalization also seem to be keen on carrying out stock buybacks. Of course, the absolute scale of their stock buybacks is dwarfed by larger companies such as Xiaomi and Ping An.
However, more small companies compared to large firms have chosen to carry out buybacks. In addition, buyback frequency also seems to be significantly higher for smaller companies.
For example, live-streaming platform Inke (HKG:3700) has carried out the most number of stock repurchases on the Hong Kong Exchange with 55 rounds in 2020 alone.
Across the board, repurchase activity is also industry agnostic. For instance, pharmaceutical companies such as CStone Pharmaceuticals (HKG:2616), real estate firms such as Zhong An Group (HKG:0672), and gaming company FriendTimes Inc. (HKG:6820), have all engaged in such activity in 2020.
Motivated by the desire to beef up share prices
In light of the COVID-19 pandemic, markets worldwide have taken a pummeling. The continued decline of stock prices, therefore, may compel companies to effect buybacks so that they can snap up their own shares at low prices.
As evident in KrASIA’s compilation above, there is a significant difference in purchasing patterns between large and small companies. However, both have been motivated by the same sense of self-preservation when carrying out buyback activity.
Aside from FriendTimes, Ping An, and Xiaomi, the stock prices of the five companies in KrASIA’s compilation above have reached a historic low, providing ample opportunity for companies to strike while the iron is hot.
Enterprises have also been carrying out buybacks in the hope of sending a strong signal to investors that the company’s stock might be undervalued, thereby enhancing investor confidence and pumping up their own stock price in the midst of an economic downturn.
Six out of the eight companies studied by KrASIA benefitted from an increase in their stock price following their buyback cycles.
Among these companies, FriendTimes’ stock price rose the most significantly. Last January, it carried out stock buybacks 13 times when its stock price was low, spending a total of HKD 3.9 million (USD 830,000) to repurchase 3.762 million shares. Its share price has risen dramatically since, and as of the closing of the Hong Kong Exchange on June 17, it reached a historic high.
Stock buybacks can also pump up company stock prices prior to the actuation of these buybacks. Companies generally need to announce such plans beforehand. Following such announcement, stock buybacks will then be carried out in batches with the goal of reaching a pre-announced target in the future.
For instance, several of Ping An and Xiaomi’s buybacks this year were part of a buyback plan announced in 2019. On the day Ping An and Xiaomi announced their buyback plans, both of their stock prices increased significantly as shareholders anticipated themselves turning a profit on buyback activity.
Share buybacks will not guarantee protection
However, share buybacks are not necessarily foolproof methods of protecting a company’s share value in the long run.
Inke’s share price reached a record high in early July 2018 but began to decline afterward. At the end of March 2019, it launched its first buyback program. As of the time of this article, it has carried out 173 buybacks.
In company announcements pertaining to the buyback, Inke claimed that the trading activity of the company’s shares had underestimated the company’s actual performance and underlying asset value. At present, however, Inke’s share price has dropped by about 50% from the day it first announced its buyback program.
Ping An is also in a similar fix. As of the close of the Hong Kong Exchange on June 17, Ping An’s share price has fallen by more than 7% from the day of its first buyback in 2020.
Share buybacks are also driven by other motivations
There are, however, myriad reasons for share buybacks: Pumping up stock prices might not necessarily be the only, or main reason for such activity.
Companies might outright cancel shares following a buyback. However, they can also deal with these shares strategically by dispensing them for employee awards, using shares as consideration for M&A, to meet share subscriptions from warrant holders, or to meet conversion requests from convertible bondholders.
Rather than issuing new shares as part of employee compensation programs, repurchasing shares with a view to redistribution can avoid diluting earnings per share. Share buybacks can also come in handy when companies want to change their capital structure significantly within a short period of time.
In particular, share buybacks can also be deployed to fend off would-be acquisitions. This is particularly applicable here, because with the decline, or volatility, in the stock market, large companies may seek aggressive takeovers of smaller public companies to further consolidate the market.
For one, the number of shares in circulation on the open market decrease, therefore pushing up share prices and increasing the costs of acquisition.
On the other hand, reducing the number of shares in open circulation also reduces the number of shares that can be purchased by would-be acquirers.
Shares left in circulation are likely to be concentrated in the hands of fewer individual investors, who are arguably, less likely to sell their shares in case of a hostile takeover.
Major companies largely holding back
At the moment, companies with larger market caps have held back from engaging in significant buyback activity. Tencent Holdings, for example, completed 24 and 31 share buybacks in 2018 and 2019 respectively but has not reported any such activity in 2020.
Among Chinese companies with a market value in excess of USD 10 billion, NetEase (NASDAQ: NTES), JD.com (NASDAQ: JD), and four other companies have reported buyback plans but have not put them into effect yet.
In addition, above-average business volatility in 2020 may lead to reported buyback commitments remaining incomplete. Yum! Brands (NYSE: YUM), for example, suspended an intended USD 2 billion share buyback program due to pressures on the F&B industry as a result of the pandemic.
In September 2019, Xiaomi also announced that it would buy back up to HKD 12 billion (USD 1.5 billion) worth of stock as part of a new share buyback program. It may be worth noting that since then, it has carried out 19 share buybacks at a total cost of HKD 2.41 billion (USD 310 million) since then— significantly lower than the HKD 12 billion (USD 1.55 billion) limit previously announced.
What comes next?
It may be worth noting that although Ping An has completed the stock buyback plan it announced in 2019, it cannot be ruled out the possibility of further repurchases. According to its Q1 earnings reports, the firm had cash and deposits amounting to about RMB 544.4 billion (USD 76.8 billion) as of March. A health cash situation does prompt one to consider whether such cash might be directed to share buybacks in the near term.
Inke’s share price has also been at a historic low since August 2019. In addition, the number of share buybacks it has carried out so far is less than half the number in 2019. If Inke’s share price does not recover from the deep end soon, the firm may soon be forced to maintain its pattern of intensive repurchasing activity.
Investors can only speculate when the next frenzy of share buybacks will begin again.
The original article was written by Song Ziqiao for 36Kr, KrASIA’s parent company. The English version was adapted by Lin Lingyi.