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Stock downtrend sparks buybacks

By Shi Jing in Shanghai | China Daily | Updated: 2018-07-16 10:35
Investors sit in front of an electronic stock board at a securities brokerage in Shanghai, June 9, 2017. [Photo/VCG]

As the market caps of A-share companies have been low during the first half of this year, a large number of listed companies have announced buyback plans to perk up market sentiment, insiders said.

On July 8, the Shanghai Stock Exchange website disclosed that 21 listed companies had announced buyback plans worth 10.1 billion yuan ($1.5 billion) this year.

Among the buybacks is the 2.2 billion yuan repurchase plan of Ningbo Joyson Electronics. The company said the move will protect investor interest and enhance market visibility for its stock.

On June 28, Zhejiang Daily Digital Culture Group attributed its 800 million yuan buyback to similar reasons.

Buybacks are more active in Shenzhen. By July 6, 270 Shenzhen-listed companies announced buybacks worth 10.4 billion yuan.

During the first trading week of July alone, 61 Shenzhen-listed companies announced buybacks worth 4.1 billion yuan. Among them, appliances giant Midea Group announced on July 4, a 4 billion yuan buyback to be completed in 12 months. The repurchase price will be no more than 50 yuan per share.

The buyback plan, upon execution, would be the largest of its kind in the history of A shares.

The Shenzhen Stock Exchange said on its website the buyback plans show listed companies are confident about their businesses, profitability and development outlook.

The buybacks will help boost investor confidence, stabilize market expectations and exert healthy influence on the capital market, it said. The Shanghai bourse echoed similar sentiments.

According to market insiders, a company generally resorts to a buyback if it feels that its shares are undervalued. Another reason for a buyback is to reward the company's employees.

The company buys back some shares issued earlier to employees by way of incentives and perks like stock options. This will help avoid diluting the stake sizes of existing shareholders.

A note from China International Capital Corporation Limited said nearly 80 percent of this year's buybacks are toward employee rewards. Yet, recent buybacks are gaining attention against the backdrop of a complex macroeconomic situation and a sluggish A-share market.

Buybacks could also be a sign that the companies concerned feel their share prices now are at a comparatively lower level.

For instance, Ningbo Joyson Electronics opened on this year's first trading day, Jan 2, at 33.28 yuan and closed at 25.98 yuan on Friday. In the same period, Zhejiang Daily Digital Culture Group opened at 15.17 yuan and closed at 8.83 yuan; and Midea Group opened at 56.38 yuan and closed at 47.84 yuan.

Fu Lichun, research director of Northeast Securities, said given the downtrend in shares, some listed companies might face price-to-cash-flow ratio problems. So, buybacks can help manage their market value.

Ever since the Shanghai Composite Index hit 3,587.03 on Jan 29, which was the highest since the beginning of 2016, the benchmark has been sliding. The contraction was even more noticeable in June, when the SCI plumbed 2,800 on June 28. On Friday, the benchmark ended 0.23 percent down at 2831.18.

Sinolink Securities analysts said buybacks have been the major driving force for the bullish stock market in the United States since last year. Only a small number of companies such as Apple Inc saw their earnings per share rise because of stronger profitability.

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