There has been some strange behaviour recently from Evergrande, even by the company’s standards. Just a month after raising HK$4.6bn through a share placing, the company started buying back shares. It has since repurchased more than the number of shares placed, pushing the share price up by more than 40%. Furthermore, it has bought shares at prices above the placing price taking into account the recent dividend.
At the end of May this year, the company took advantage of the run-up in its share price to raise additional equity. It placed 820m shares at a price of HK$5.67 per share, an 18% discount to the previous closing price, triggering a sharp drop in the company’s share price.
Since 8 July, the company has repurchased 1,036m shares, more than the number issued and nearly a fifth of the free float, at a total cost of HK$4.9bn. Between 8 and 29 July, buy-backs accounted for almost 40% of the total share volume, increasing to nearly half in the last few days (see Figure A).
Figure A: Share buy-backs
Evergrande’s share price has increased by over 40% since starting the buy-backs while its Hong Kong-listed peers have been flat (see Figure B). Adjusting for the recent dividend, which was also paid on the placing shares, the company has bought shares at a significant premium to the placing price.
Figure B: Share performance
Under Hong Kong’s Listing Rules (para 10.06), the company can only repurchase shares at prices, which are less than 5% above the average closing price for the previous five trading days. This maximum permitted price, in effect, a hard ceiling for purchases on any given day. Figure C shows the maximum price paid by Evergrande each day compared to this maximum permitted price. On each day that Evergrande has bought back shares, it has done so right up to this limit.
Figure C: Maximum purchase price vs. maximum permitted price
On three days during this period, the company did not purchase any shares while on several others, it bought only a small number. The likely reason for this is that it was not able to buy shares on these days, as the maximum permitted price was lower than, or only slightly above, the “Low” share price on that day (see Figure D).
Figure D: Maximum permitted price vs. day high/low
The company has just over 400m shares left of its existing buy-back mandate. It has signalled its intention to repurchase more shares by seeking shareholder approval to renew the mandate. A recent press release indicated that the purpose of the buy-backs was “to fight against malicious short selling”. Nonetheless, the company will have to halt purchases shortly. The company must publish its interim results by the end of August and buy-backs are prohibited in the month before any results announcement. It will be interesting to see how the shares perform without this prop.
Evergrande appears to be actively trying push its share price up as high as possible. There has been very little subtlety to the buying. Contrary to some views expressed, it is not true to say that the company’s actions are “shareholder friendly”. It is not just short sellers that are hurt. The only shareholders that benefit from the company’s largesse are those who sell their shares; the remainder suffer a dilution in value if the company pays more than the shares’ intrinsic value. Nonetheless, the real puzzle is why the company is so keen to boost its share price.