Goldman and Morgan Stanley predict who’s next


Asia has seen a wave of stock buybacks, and banking analysts say it won’t stop anytime soon.

Chinese tech giant Alibaba announced last week that it would increase its share buyback program from $15 billion to $25 billion. Phone maker Xiaomi on Tuesday announced a takeover of up to HK$10 billion ($1.28 billion), while JD Health, the online healthcare arm of JD, said it would buy shares of up to HK$3 billion.

The news sent the shares of these companies skyrocketing.

“Chinese companies are behaving similarly to their American counterparts by announcing large share buyback programs on weakness in an effort to bolster investor confidence as their company’s growth slows,” it said. Ben Silverman, director of research at investment advisory firm Verity.

Here’s how stock buybacks work: When a company buys back its own shares, the move reduces the number of shares that are publicly traded.

The buyback can drive up the price of each share because some common metrics used to gauge a stock’s price are spread across fewer shares. As a result, the stock may look more attractive.

The trend is not limited to Chinese tech giants. British bank HSBC, insurance giant AIA and Japanese carmaker Toyota have also announced share buybacks in recent weeks.

“Accelerating trend” of share buybacks

Chinese tech stocks have fallen since last year due to regulatory repression in China as well as US-China tensions, among other factors.

“We have seen an accelerating trend of Chinese companies announcing takeover plans [year-to-date] amid a broad downgrade in Chinese equities,” Morgan Stanley said in a March 24 note.

“We believe this trend will continue for longer as it is reinforced by the [China Securities Regulatory Commission] statement last week explicitly encouraging listed companies to engage in share buybacks,” analysts at the investment bank said.

There was speculation that Tencent could be next, although markets were disappointed when the Chinese gaming giant failed to announce a takeover recently.

“The market was definitely expecting Tencent to announce a takeover. I think it was mainly because Alibaba did it and the positive price reaction,” said Neil Campling, head of technology, media and telecommunications research at Mirabaud Equity Research.

“[Tencent] noted that their own share price had also fallen significantly – which could be a sign that they would be considering a buyout, so I don’t think that possibility should be ruled out in its entirety,” he said. added.

Nomura said a combination of generally modest stock market valuations and “reasonably strong” balance sheets will lead to increased share buybacks. The trend suggests the possibility of higher returns for shareholders, the Japanese investment bank said.

“We believe this theme is likely to be front and center in the coming weeks, particularly after a rally in shares of [U.S.-listed Alibaba] after increasing its share buyback program by $10 billion,” the March 24 memo reads.

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In the near term, markets will react favorably to buyback announcements, particularly for U.S.-listed Chinese stocks, according to Morgan Stanley’s analysis of data from 2014 to 2021 for those stocks as well as A-shares or listed stocks. on the continent.

“Chinese stocks listed in the United States reacted the most positively compared to Hong Kong listings and A-shares,” analysts at the investment bank said.

The stocks best positioned to make buybacks

Morgan Stanley selected the stocks best placed to make takeovers based on a list of criteria: balance sheet strength to support takeovers, “deeply discounted” company valuation, large market capitalization and strong fundamentals.

Here are the top 20 stocks in Morgan Stanley’s pick, sorted by market capitalization:

Kweichow Mutai
Ali Baba
Wuliangye Yibin
Mindray Bio-Medical
China Tourism Group Duty Free
Shanxi Xinghuacun Fen Wine Factory
Jiangsu Hengrui
Anta Sports Products
Cosco Expedition
Foxconn Industrial Internet
Gree electrical appliances
Nari Technology

Goldman Sachs has also been sifting through stocks likely to conduct share buybacks. In a March 25 memo, the bank said it was focusing on companies with a history of share buyback announcements.

“While cash-rich, high-earnings growth stocks seem particularly well positioned to buy back shares, we note that companies with no history of buybacks often do not announce buybacks, even when they are cash-rich,” Goldman said, explaining why he focused on companies with a history of such moves.

Here are the top 10 Japanese stocks of Goldman Sachs, sorted by market capitalization. The companies have announced buyouts in five of the past six fiscal years, but have yet to announce any in fiscal 2021:

Dai-ichi life
Daiwa Securities Group
Tokyo Gas
Sekisui Chemicals
This is
Hirose Electric

CNBC’s Michael Bloom contributed to this report.


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