Surge in Hong Kong Stock Buybacks Is Bullish Signal to HSBC

  • Increases in repurchases in 2008, 2011 foreshadowed rallies
  • Hang Seng Index trades near cheapest level in seven years

Hong Kong companies are scenting a bargain in their shares.

At least 80 firms in the city repurchased stock in January, the most in four years, and another 42 snapped up shares last month. The last two times buybacks were this widespread, in 2008 and 2011, the Hang Seng Index climbed at least 18 percent over the following 12 months.

For analysts at HSBC Holdings Plc, history is poised to repeat as buybacks add to signs that the Hang Seng index’s 8.8 percent tumble this year was excessive relative to earnings prospects. The benchmark equity gauge trades at 9 times reported profits, near the cheapest level since the depths of the global financial crisis and the biggest discount to global shares in 15 years.

“There appears to be quite a good relationship -- a month before the market bottoms, share buyback activity surges,” Steven Sun, head of Hong Kong and China equity research at HSBC, said in an interview. “Company insiders such as senior management should know their own business outlook and the intrinsic value of the company better than the average investor.”

HSBC estimates Hong Kong-listed companies have bought back shares worth a total of HK$58 billion ($7.5 billion) since July.

Business Outlook

Zijin Mining Group Co. and Want Want China Holdings Ltd. were among companies repurchasing shares in January. Zijin, China’s biggest gold miner, has rallied 42 percent since that month ended through Wednesday, while snack maker Want Want climbed 9.7 percent. The Hang Seng gauge, which slipped 0.1 percent on Thursday in Hong Kong, has risen 1.5 percent since the end of January.

While an increase in share buybacks may indicate cheap valuations, it may also reflect managers’ doubts about the business outlook, according to Daniel So, a strategist with CMB International Securities Ltd.

“Such activity doesn’t always signal a bottom as companies don’t time the market,” So said. “Companies are spending their cash on buybacks instead of expanding their businesses.”

Buybacks have also been prominent in other major markets. Companies in the Standard & Poor’s 500 Index spent about $445 billion on repurchases last year, according to Deutsche Bank, while companies in Japan are projected to fork out a record 5.9 trillion yen ($52.3 billion) in the fiscal year ending March 31.

Good Indicator

“In the U.S. we’re talking about a much bigger scale of share buybacks, which is not traditional here in Hong Kong," Sun said. “That means buybacks have more indicative power in Hong Kong. Historically this has been a good indicator."

A jump in Hong Kong share repurchases in September 2011 coincided with a 14 percent plunge by the 50-member index as concerns about Europe’s debt crisis and a U.S. economic slowdown roiled markets across the world. The Hang Seng rebounded 18 percent over the following 12 months after bottomed out on Oct. 4.

October 2008 marks the steepest increase in equity repurchases in the city, when 124 companies bought back their shares. The gauge tumbled 22 percent that month as the collapse of Lehman Brothers Holdings Inc. sparked concern that the global financial system was in jeopardy. The index jumped 56 percent in the next 12 months after reaching its low on Oct. 27.

While plunking down hard cash for buybacks is a defensive strategy, it’s also “opportunistic,” according to Uwe Parpart, the chief strategist at Capital Link International Holdings Ltd. in Hong Kong.

“The reason they do the buyback is because they think it’s near the bottom,” Parpart said. “It would be foolish to wait until later when the market has gone up higher again.”

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