Buyback activities have never been as hot as today. Share buybacks for US equity market will exceed US$800bn for 2018 (+40% YoY), while this record high level should increase by 20%-plus to a new all-time high of almost US$1 trillion for 2019, according to Goldman Sachs estimates. In Hong Kong, at least 84 listed companies bought back their shares in October this year - the highest number for a single month since September 2011, adding the total buyback amount YTD to HK$26.9bn. Likewise, 609 A-share companies in China have repurchased a total amount of RMB33.6bn YTD in 2018, exceeding the sum of the previous three years. However, investors have to look into details that buybacks could be led by different reasons or drivers, which may give you a different sign about the market and leading to a total different investment outcome.
Figure 1. China A shares buyback activities increased rapidly in recent months
Source: Wind, Hua Chuang Securities
For Hong Kong stock market, buyback activity has not been very active compared to US as it usually increases only during stock market downturn (e.g, in October 2008 during the financial crisis; in September 2011 as HSI fell 35% in 5 months, and in Aug 2015 when HSI down 12% in 3 months). The same case repeats in this year as the stock market crashed by over 24% from the peak level and we saw buyback has picked-up in 2H18 gradually. This is because buyback during downturn helps to signal confidence in the company’s future as shares are undervalued after the fall. In particular, if the buyback comes together with stakes raising by company owner, major shareholder or senior management, the signal is even more positive since the money come from their own pockets rather than company’s money and these people know their business more than anyone else.
Similarly, buyback has not been very popular in A-share market as regulations for buyback in China stock market is tighter and more restrictive and it requires a lengthier approval process in the past. Besides, as many of the Chinese companies are still in the growth stage, management prefers to reserve more capital for R&D and expansion purpose in order to generate a higher return for investors over the long-term. Therefore, buyback activities generally increase when stock market is in trouble only. The rise of buyback in China A-share this year has been supported by the government thanks to the amendment of company law and a more simplified approval process as initiated by China Securities Regulatory Commission (CSRC) in September this year. At the same time, the CSRC has encouraged more listed companies for the implementation of equity incentives and employee stock ownership plans, which also drove the buyback of A-share this year. All these actions are actually in response to the SPL issues in China as buyback should help to stabilize the market sentiment and as a support to the falling share price. Historically, Hong Kong and A-share stock markets have appeared near the bottom and are close to the inflection point when share repurchase surge to the record high level.