Stock market booster: repo

On October 26, 2018, the Company Law was amended and passed by the National People's Congress Committee, and the most critical change in the provisions is on share repurchases.

There are two major changes in the new share repurchase: one is that there are almost no restrictions on the reasons for the repurchase, and the other is that treasury shares are more widely used and can be cancelled, converted into convertible bonds, used for employee stock ownership and equity incentives, and even transferred.

Under the guidance of the new company law, A-shares have set off a boom in share repurchases. As of the last trading day of 2018, a total of 782 companies have carried out repurchase programs, with a repurchase amount of up to 61.702 billion yuan, achieving record growth. Among them, 145 companies repurchased more than 100 million yuan, 7 repurchased more than 1 billion yuan, and 48 repurchased shares accounted for more than 5% of the total share capital.

On December 15, 2023, the China Securities Regulatory Commission (CSRC) issued the Rules for Share Repurchase of Listed Companies, which is intended to encourage listed companies to attach importance to repurchases, implement repurchases, standardize repurchases, and actively safeguard the value of companies and shareholders' rights and interests. At the same time, it has intensified the crackdown on "flickering repurchases" and strictly investigated and dealt with those who use repurchases to carry out insider trading, market manipulation, and other illegal acts.

Buybacks are considered one of the most important means of the U.S. stock bull market, and Microsoft once bought back more than a quarter of its shares. In the process of falling Hong Kong stocks in 2018, Tencent also spent nearly HK$900 million to buy back shares for 24 consecutive trading days. In 2023, the scale of Hong Kong stock buybacks increased by 20% year-on-year to HK$125.926 billion, a record high. Among them, Tencent's repurchase amount accounted for 40% of the total amount, reaching HK$48.4 billion. In January 2024, Tencent conducted 13 buybacks in a month, involving more than HK$9.8 billion.

Advantages and disadvantages of buybacks

Why are listed companies keen on buybacks? Are there any drawbacks?

Let's start with the benefits:

1. Stabilize the stock price

The operation of buying back shares from the secondary market has little impact on the market because the amount is not huge. However, it can show investors the determination and confidence of listed companies, so it is conducive to stabilizing the stock price.

2. Optimize the asset structure

For the financial statements of listed companies, the cancelled shares can optimize the asset structure and increase the value of the single share of the listed company's outstanding shares. In 2004, there were 10.8 billion shares of common stock of Microsoft, but after annual repurchases, there are now only 7.7 billion shares, and the share capital of common stock has decreased by a quarter.

3. Shareholders who return value investments

For high-quality enterprises with good cash flow, the share value of the circulating shareholders can be increased after the cancellation of the repurchased shares. The major shareholders have realized the market value management, and the circulating shareholders have enjoyed the relevant benefits, which is conducive to investors to choose value investment.

4. Promote the market for convertible bonds

Under the terms of the new Companies Act, the repurchased shares can also be used for convertible bonds. In other words, in essence, stocks can be used to repay debts, which broadens the company's financing channels in disguise, and the issuance of convertible bonds will be more popular.

There can be no only benefits in any matter, and the same is true for repurchases.

Let's talk about the drawbacks:

1. There is almost no limit to buyback

The provisions of the new company law are more powerful for listed companies and weaken the protection of investors, especially small and medium-sized investors. If the original law required the approval of the general meeting of shareholders, the new law only needs to be approved by the board of directors. Listed companies can buy back almost as much as they want. The Repurchase Rules impose certain restrictions on flickering repurchases, but there is still a lot of room for maneuver in the actual implementation process.

2. Risk of treasury stocks

Since treasury shares can be transferred, this gives listed companies the opportunity to speculate on their own shares, especially before the release of the listed company's financial report, giving the listed company room to operate.

Now, with the recession of A-shares, taking advantage of the downturn in stock prices, A-shares have ushered in a new round of buybacks.

The repurchase of shares has become a means of managing the market value of listed companies

In October last year, Gree Electric announced that Dong Mingzhu, chairman and president of the company, proposed to repurchase the company's shares with no less than 1.5 billion yuan and no more than 3 billion yuan of its own funds.

As of the end of 2023, Gree Electric has completed a share repurchase of 3 billion yuan.

Although Gree did not achieve Haikou, which boasted a revenue of 600 billion yuan five years ago, its operating level has been improved.

Recently, it announced its earnings announcement. It is estimated that in 2023, the total operating income will be 205 billion yuan to 210 billion yuan, a year-on-year increase of 7.8%-10.4%, the net profit will be about 27 billion to 29.3 billion yuan, a year-on-year increase of 10.20%-19.60%, and the non-attributable parent will be 26.1-27.8 billion yuan, a year-on-year increase of 8.8%-15.9%.

In 2023, the company's operating performance will be stable and upward, with revenue and profit increasing compared with the same period last year. At the same time, the company continues to carry out industrialization transformation, and continues to make efforts in diversified fields such as high-end equipment, industrial products, and green energy, so as to create more leading technologies and provide growth momentum for performance.

Backsliding buybacks

On November 17, 2023, Hezong Technology issued two announcements in succession, both of which involved the company's commitment to repurchase but did not implement it.

Hezong Technology previously announced that it planned to repurchase 20 million yuan to 40 million yuan to repurchase shares, but it was not implemented after a year. It is worth noting that as of the end of the third quarter of this year, the company's monetary fund book balance was 1.883 billion yuan.

In this regard, the Shenzhen Stock Exchange issued a letter of concern, requiring the company to explain whether there is a situation of using the repurchase plan to speculate the company's stock price and mislead investors, and at the same time, the Shenzhen Stock Exchange will initiate disciplinary proceedings against the company.

Subsequently, the "Decision on Notification of Criticism and Punishment" issued by the Shenzhen Stock Exchange shows:

Beijing Hezong Technology Co., Ltd. was given the sanction of circulating criticism.

For the above-mentioned violations of Beijing Hezong Technology Co., Ltd. and the sanctions given by the firm, the firm will be recorded in the integrity file of the listed company and disclosed to the public.

But this punishment seems to be almost a problem, and it should be fined and even forcibly repurchased, otherwise it will not hurt or itch.

summary

Buybacks are a policy that is beneficial to both the stock market and listed companies.

Because of this, many listed companies have adopted the strategy of "rubbing hot spots" to manage market value.

Therefore, when investors identify the repurchase announcement, they should analyze the company's capital situation and profitability, and whether it really has the strength to repurchase. It is recommended to judge the company's financial strength from the following perspectives:

One is the balance of monetary funds in the latest financial statements, which is the company's immediate cash-out funds, if the monetary funds are more than enough relative to the repurchase amount, then the company is likely to be able to complete the commitment;

The second is to look at the bank bills in the notes receivable, generally speaking, the bank bills will be unconditionally paid by the bank within six months, so the bank bills are very liquid;

The third is to look at other current assets in the bank wealth management products, in recent years, buying wealth management is a common means of cash management of listed companies, many companies do not have high monetary funds, but most of the cash has gone to buy wealth management products;

Fourth, it is necessary to verify the company's liabilities, especially short-term borrowings, long-term borrowings within one year and bank bills in notes payable, which are to be paid in the short term.

If the assets with better liquidity such as monetary funds, notes receivable, and bank wealth management are much larger than the short-term liabilities, then the company's repurchase is more likely to be implemented eventually. At the same time, it is also necessary to compare the company's cash flow statement in the past few years, whether the net operating cash flow is positive all year round, and it is relatively close to the net profit, and the company with normal operating cash flow has the ability to implement the repurchase plan.