Feeling downbeat on Hong Kong stock market? Follow buy-backs as tonic for higher returns, Haitong says

Hang Seng Index members gained 19 per cent on average one year after repurchases, according to Haitong Securities, based on five waves of buying since 2008
The latest episode, fuelled by Alibaba and Tencent buy-backs, suggests the trend could persist

Hang Seng Index

Zhang Shidongin Shanghai

Published: 8:30am, 9 Apr, 2022

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Investors feeling downbeat about the local stock market’s wavering performance this year may look up to stock buy-back programmes for a boost. They may foreshadow a run-up based on past precedents.

Shares of Hang Seng Index members gained 19 per cent on average one year after buy-backs, according to Haitong Securities, based on five waves of such stock repurchases since 2008. The Tech Index members rallied by 53 per cent on average, using simulated data going back to 2015.

From Alibaba Group Holding to Li Ka-shing’s flagship CK Asset Holdings, Hong Kong-listed firms have spent HK$42 billion (US$5.4 billion) buying back their own stock since May amid China’s crackdown, Haitong calculated. That exceeded the HK$7.6 billion to HK$26.1 billion range in the previous five rounds.

A man stands next to a bank’s electronic board showing the Hang Seng Index in Central, Hong Kong. Photo: AP

“Historically, all sectors of the Hong Kong market stabilised after the buy-back waves,” Xun Yugen, a strategist at the Shanghai-based brokerage, said in a report on Wednesday. “Information technology stocks typically could fetch relatively high absolute and above-average returns.”

The unprecedented buy-backs this time appear to have the seal of approval from Beijing officials who, alarmed by a plunge in prices last month, recommended such action last month among measures to boost investor confidence. The Hang Seng Index swung 40 per cent in between its slump to a decade-low in mid-March.

Buy-backs are typically deemed as a market-support mechanism because of extreme undervaluation, or a lack of investment options to deploy excess cash.

Alibaba expands share buy-back to a record US$25 billion amid stock price slump

“Hong Kong and Chinese equities markets are still trading at depressed valuations” Eli Lee, head of investment strategy at Bank of Singapore, said in a report, given that MSCI China and Hang Seng Index are trading far off their seven-year average.

Vice-premier Liu He, who chairs a State Council committee, has vowed to support the market after a slump in March, Photo: Reuters

The discount in Chinese stocks relative to peers in emerging markets is now the deepest since 2014, Lee added. The Hang Seng Index trades at a 13 per cent discount to the net asset value and is the second cheapest globally after Brazil, in terms of the price-to-earnings ratio, according to Bloomberg data.

China stock buy-backs get seal of approval as Goldman sees winning run

In the past five waves, stocks performed best in 2009 when 12-month post-buy-back returns reached 50 per cent for Hang Seng Index members, according to Haitong Securities. The poorest was 1.5 per cent in 2019. The Tech Index members surged 107 per cent after the 2020 buy-back spree.

The latest episode suggests the trend may persist. The Hang Seng Index has rebounded 18 per cent from a March 15 low after Beijing vowed to support the market and the economy. The Hang Seng Tech Index has risen 26 per cent during the period.

Alibaba, the owner of this newspaper, has gained 43 per cent from a record low in March after boosting the size of its buy-back programme to US$25 billion from US$15 billion. Tencent Holdings has risen 23 per cent after buying back its own shares six times since March.

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