The Insider

Insider buying by directors eases to HK$118 million for the week

Notebable buying activity took place in Chinasoft International and Colour Life Services Group, while insider sales were recorded in Shenzhen International Holdings

PUBLISHED : Sunday, 16 July, 2017, 7:34pm
UPDATED : Sunday, 16 July, 2017, 10:33pm

“Tencent has been buying back their stock pre-opening bell to prop up their stock from dropping further throughout June. Will it ... 1) Be enough to prevent a further drop throughout the day? 2) Protect itself from the tech sell off in the US? If you think about it, buybacks is a type of stock manipulation. They can sell their buybacks at anytime once people reinvest. It’s like a casino and the house always wins.”

Reader comment from July 9, 2017

Tencent Holdings, based on Hong Kong stock exchange filings, has not repurchased shares in the past three years, as its last buyback was recorded in June 2014. As for director activity, executives of Tencent have been pure sellers since 2005 with HK$24 billion (US$3.06 billion) worth of disposals. The last sales by directors of Tencent were from April to May this year worth HK$345 million. Heavy insider sales surely are not a good way to prop up a stock.

As for firms being able to sell their buybacks, shares that are repurchased are taken out of the circulation which in turn reduces the issued share capital. To get those cancelled shares back into the market, a listed firm must apply for reinstatement which is not an easy process.

The stock exchange has also implemented controls to prevent stock manipulation such as limiting buybacks in a given month to no more than 25 per cent of the previous months’ turnover. The only time the Hong Kong stock exchange allowed listed firms to buy back more than 25 per cent of the previous month’s turnover was during the Asian financial crisis in 1998 due to very low activity in the market.

A listed firm can also only buy back a maximum of 10 per cent of the issued capital within the 12-month period upon gaining approval from shareholders. Once that 10 per cent threshold is reached they must seek approval from shareholders to buy back another 10 per cent. There are also price range limits a listed company can repurchase shares in a given day to prevent stock price manipulation.

Companies that buy back shares are usually cash rich and debt free. They use the capital to buy back shares to return value back to shareholders by increasing earnings per share due to the reduction of the issued share capital.

Firms buy back because they find more value in buying their stock than investing their capital in other means. Listed firms also use buybacks as a form of price support during steep market downturns.

The insider activity plunged based on filings on the exchange in the second week of July with 29 companies that recorded 176 purchases worth HK$118 million versus 11 firms with 41 disposals worth HK$183 million. The buy figures were sharply down from the previous week’s 50 companies, 234 purchases and HK$163 million. On the selling side, the number of firms and trades were sharply down from the previous week’s 18 companies and 77 disposals. The sell value, however, was sharply up from the previous week’s disposals worth HK$125 million.

Aside from directors, the buyback activity fell with 21 companies that posted 105 repurchases worth HK$225 million based on filings from July 7 to 13. The figures were down from the previous 5-day totals of 25 firms, 156 trades and HK$771 million.

There were several significant filings last week with insider buys in Chinasoft Internationa l, multiple director sales in Shenzhen International and consistent buybacks in Colour Life Services Group.

Chief executive Chen Yu-hong acquired shares of mainland e-government solutions and customised software products provider Chinasoft International at lower than his sale price in April 2015 with 300,000 shares purchased on July 7 at HK$3.95 each. The trade increased his holdings to 444.69 million shares or 18.52 per cent of the issued capital. He previously sold 30 million shares in April 2015 at HK$4.72 each and 586,000 shares in August 2013 at HK$2.27 each. Prior to his trades since 2013, Chen acquired 1.35 million shares in January 2013 at HK$1.85 each. The stock closed at HK$4.07 on Friday.

There are three significant points on this purchase:

The purchase by the CEO following a long lay-off at below his sale price in 2015 is a strong sign that the stock is undervalued at the current level

The purchase was made on the back of the 16 per cent drop in the share price since May from HK$4.73. Despite the fall in the share price, the counter is still up since September 2015 from HK$2.39

The group announced its year-end results in March with profit up by 57.9 per cent to 442.081 million yuan.

Executive directors Hu Wei and Liu Jun recorded sales in logistic infrastructure facilities investor and operator Shenzhen International Holdings with a combined 884,000 shares sold from June 30 to July 10 at HK$14.40 to HK$13.70 each, or an average of HK$13.94 each. The disposals were made at a profit based on the 884,000 shares that they acquired via options during that same period at HK$8.92 each. The stock closed at HK$13.58 on Friday.

There are three significant points on the recent sales:

The disposals were made after the stock rose by as much as 30 per cent from HK$11.08 in February

Options-related sales are semi-bearish signals as directors who are inclined to take quick profits would hold on to at least a portion of those shares if they expect their companies’ share prices to rise further.

The recent sales were fetched at higher than executive director Zhong Shan Qun’s purchase price earlier this year based on the 68,000 shares that he acquired on May 31 at HK$12.66 each

Real estate management firm Colour Life Services Group has been buying back in the past two months with 2.05 million shares purchased from June 20 to July 13 at an average of HK$4.86 each. The Group last bought 743,000 shares from July 7 to 13 at an average of HK$5.33 each. Aside from the repurchases since June, the company acquired 970,000 shares from April 19 to 28 at an average of HK$4.56 each. The stock closed at HK$5.52 on Friday.

There are seven significant points on the recent buybacks:

The repurchases since June were made on the way up from HK$4.48 to HK$5.44 each

The buybacks accounted for 6 per cent of the stock’s trading volume

The group embarked on this buyback spree after the stock rebounded by as much as 23 per cent from HK$4.42 on June 6.

The company repurchased shares on 10 out of the 18 trading days from June 20 to July 13

The repurchases since April are the company’s first buybacks since listing in June 2014

The Group’s buyback prices were near the IPO price of HK$4.60

CEO Tang Xue Bin acquired 450,000 shares on May 10 at HK$4.43 each

Robert Halili is managing director of Asia Insider