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So what’s wrong with the Hong Kong market? Compared to the late 1990s, Hong Kong companies have stronger balance sheets, more international competitiveness, and a more stable currency regime. An analysis of Hong Kong’s 850 largest companies reveals that around half have more cash than debt and the majority (67%) are still profitable.
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Hong Kong stock market falls below the 15,000 yen level, the lowest in 15 months
Hong Kong stock market falls below the 15,000 yen level, the lowest in 15 months
Our research, based on data from Bloomberg and information from the Hong Kong Exchange website, shows that out of more than 2,000 listed companies, 467 companies paid dividends and conducted share buybacks in the past 12 months. There were only 238 companies. Even share buybacks have been scant, with only 52 companies buying back more than 2% of their outstanding shares. Now is the time to be bold. Stocks are cheap and investors are looking to business leaders to instill confidence.
It’s time for the Hong Kong market to evolve. The US experience shows that CEOs who accept share buybacks and bet on their own stock can be rewarded. Take AutoZone for example. Since its initial public offering in 1991, the auto parts business has grown revenues at a respectable 10% per year, but the company’s stock has fared even better, with an annual return of 21%.
Autozone’s management team is focused on profitability and returning cash through share buybacks. The outpacing of sales growth in stock returns to investors can be largely explained by AutoZone’s management’s aggressive buybacks, reducing its stock count by more than 88 percent over the past 25 years.
During that period, AutoZone repurchased and retired an average of 8% of its stock each year. Steady and aggressive repurchases increase over time. AutoZone shareholders enjoy a 490x return on equity.
Such large buybacks are the exception and not common, especially in the Hong Kong market. The Hong Kong Stock Exchange should follow the example of the Tokyo Stock Exchange and put pressure on struggling companies to treat shareholders better.
Hong Kong CEOs can blame the market for undervaluing their companies, but talk is cheap. Which companies use market sales to bridge the difference between fair value and market price?
Hong Kong investors should benefit more from Hong Kong’s corporate leadership to reinvigorate the once vibrant stock market. More aggressive share buybacks and insider acquisitions can accomplish this.
Daniel Rapp is the founder and chief investment officer of Parkway Capital, based in Hong Kong.
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