American firms have ramped up their share buybacks over the past 10 years. Riding on the low interest rate environment, many borrowed to do so. The amounts spent on share repurchases came close to topping $1 trillion last year, as companies tried to raise shareholder returns or sweeten incentive programmes.
Over in China, A-share companies have learned the trick as well. The latest to join the trend is Gree Electric Appliance, a leading white goods maker that has been widely held by foreign investors. (Archrival Midea Group also embarked on a stock buyback of up to Rmb5.2 billion in February.)
The Shenzhen-listed firm announced this month that it is planning to buy back shares worth up to Rmb6 billion ($850 million) over the next 12 months. The equity will be used for employee stock ownership plans or other management incentives, Gree said. It expects to use existing funds for the repurchases, although just days after making the announcement Gree informed investors that it has also received regulatorly approval to raise up to Rmb18 billion by selling debt.
Gree had more than Rmb130 billion worth of cash sitting on its balance sheet at the end of last year. However, China’s largest air-con maker has a longstanding reputation for not always being too generous in its payouts to shareholders. For instance, the Zhuhai-based firm enraged investors in 2018 by skipping a dividend payout and opting to spend heavily on its new semiconductor business instead (see WiC408).
The feud nearly put Gree CEO Dong Mingzhu’s job on the line (see WiC347). Her relationship with Gree’s main investors has since improved after Hillhouse Capital (a fund house that made its big break investing in Tencent, see WiC293) spent $7.5 billion for a 15% stake in Gree last year. The shares were put up for sale by the local branch of Sasac (China’s state-owned asset manager), which was replaced as Gree’s single biggest shareholder.
Other investors like the change in the shareholding register as well. Gree’s share price surged to a record high of Rmb70.56 just a few months after the bloc trade.
The buyback will be capped at Rmb70 per share (Gree was trading at Rmb54 as of Wednesday). Unlike the dividend-skipping saga two years ago, Gree’s management now says it has the financial strength to raise shareholder returns, while also committing to an investment in a new business segment.
In a briefing streamed online in March, Dong said Gree will invest up to Rmb1 billion to develop a new line in high-end medical equipment. Like many other firms, it has already restructured some of its production lines to make medical kit such as ultraviolet disinfection devices, air purifiers and medical masks.
The new business idea comes after Dong told reporters that home appliance sales amounted to “little more than nothing” in February. The broader white goods market, National Business Daily reports, is likely to shrink by 45% during the first quarter of this year. Companies that rely more on overseas sales are facing even direr prospects. Hisense, for one, was reported to be on the verge of laying off up to 10,000 of its workers because of the slump in demand.
Hisense refuted the claims last week, saying news of the layoff plans was not “entirely accurate”. However, the TV maker, which derives 40% of its income from overseas markets, admitted that orders have plunged. Hisense is a serial sponsor of international sport events such as the football World Cup (see WiC414) but that strategy has also backfired as the pandemic has brought the sports world to a standstill too.
As it waits for sales to recover Hisense is promising to protect “the rice bowls of tens of thousands of excellent staff”, although it also acknowledged that senior managers will be taking a pay cut and said that the worst-performing staff would be made redundant as part of the bid to save jobs as a whole.
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