Strategy Note /
Hong Kong

HK : Strategy - Buybacks Surge as Market Heads South

    Mark Po
    Mark Po

    Research Analyst

    CGS-CIMB
    16 May 2022
    Published by

    We believe stock buybacks show management's view of the listed company's operating outlook and current valuation, and indicate that the company has sufficient cash or credit sources. The stock buyback trend tends to be negatively correlated with the performance of the Hang Seng Index. In 2008, 2011, 2016, 2018 and 2021, when the market turned bearish after a rally in previous years, there was a wave of stock buybacks, often followed by a relative market recovery. So we believe a large number of buybacks can be used as an indicator of a potential market rebound. Although the overall value of buybacks in 2021 reached a record high in the Hong Kong stock market, the wave of stock buybacks has continued in 2022. Investors should pay attention to market recovery opportunities in the sectors and companies with frequently announced buyback plans. There are two main share arrangements after buybacks from the secondary market by Hong Kong listed companies. One is when the listed company directly buys back stocks from the secondary market in its own name. The other is when the listed company sets up an ESOP trust, where an independent third-party trust company buy stocks from the secondary market. The direct buybacks help increase earnings per share, while establishing an ESOP trust to do buybacks establishes a stock reward pool, which helps bind the interests of the company and employees.