A tsunami of stock buybacks has swept Asia, and analysts predict that it will continue with more companies.
For example, Alibaba, the Chinese e-commerce behemoth, said this week that it will increase its share repurchase programme from $15 billion to $25 billion, while Xiaomi announced a repurchase of up to 10 billion Hong Kong dollars ($1.28 billion) this week.
Meanwhile, JD Health, JD’s online healthcare division, said it will buy back up to 3 billion Hong Kong dollars worth of shares.
Basically, what happens is that when a corporation repurchases its own stock, the number of publicly traded shares is reduced—and that’s how share buybacks work.
Since several popular measures used to evaluate a stock price are spread across fewer shares, the buyback can push the price of each share upward. As a result, the stock may appear more appealing.
The trend isn’t limited to Chinese IT behemoths. In recent weeks, British bank HSBC, insurance giant AIA, and Japanese manufacturer Toyota have all announced stock buybacks.
However, China’s tech equities have been falling since last year, owing to regulatory crackdowns in the country as well as tensions between the US and China, among other things.
In this case, Morgan Stanley recently stated that according to its analysis, an accelerating trend of Chinese companies announcing buyback plans has been noticed against the backdrop of widespread Chinese equity valuation depreciation.
“We believe this trend will continue for long as it is reinforced by the [China Securities Regulatory Commission] statement last week explicitly encouraging listed companies to conduct share buybacks explicitly encouraging listed companies to conduct share buybacks,” said Morgan Stanley.
Now, Tencent is expected to be the next, even though markets were disappointed when the Chinese gaming giant did not announce a buyback recently.
As reported, an industry insider believes that Tencent did note that their own stock price has dropped significantly as well— which may be a sign that they would consider a buyback—so the possibility should not be completely ruled out.
However, Morgan Stanley selected stocks that are best suited for buybacks based on a set of criteria, including balance sheet strength to support buybacks, “heavily discounted” company valuation, a sizable market cap, and strong fundamentals.
Morgan Stanley’s top stocks, sorted by market capitalisation, include Kweichow Moutai, Alibaba, JD.com, China Tourism Group Duty-Free, Xiaomi, Foxconn Industrial Internet, and a few other names.
Goldman Sachs also looked for companies that were likely to engage in stock repurchases. It noted in a March 25 report that it concentrated on companies with a history of share buyback announcements.
Goldman Sachs’ top Japanese equities, listed by market capitalisation, include KDDI, Fujitsu, Tokyo Gas, Toho, Hirose Electric, and others.
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