The phenomenon of cancellation-based stock buybacks among publicly traded companies has witnessed a rapid increase in recent timesTo put this into perspective, data reveals that as of December 10, 2023, there have reportedly been approximately 1,500 cases of stock buybacks executed in the Chinese stock marketOut of these, 262 instances were for the purpose of canceling shares or included cancellation as an alternative option, accounting for close to 18% of the total buyback casesThis marks a significant jump from the prior year, where the ratio of cancellation-based buybacks was less than 9%.

In previous years, buyback activities predominantly aimed at employee stock ownership programs or equity incentivesThe common practice involved canceling shares only when departing employees had unutilized stock options or when their incentive agreements were terminatedHowever, 2023 has seen a marked increase in share buybacks that focus on reducing the company's registered capital, indicating a shift in corporate strategies.

Tian Lihui, the Director of the Financial Development Research Institute at Nankai University, highlighted that cancellation-based buybacks can enhance shareholder value, boost market confidence, and help in optimizing capital structures

Yet, he cautioned against excessive buybacks that could consequently lead to cash flow tightness for companies.

Interestingly, the number of cancellation-based buybacks has doubled when compared to last yearOn December 15, regulatory changes were introduced, aimed at enhancing the convenience of stock repurchases and improving the constraints that govern themThis optimization encourages companies to recognize the importance of buybacks while effectively implementing and regulating them to maintain their corporate value and shareholder rights.

The statistics for this year are strikingOver 2,000 listed companies have completed stock buybacks, amassing a total value of approximately 162 billion yuan—setting a historic highIn the same period last year, the buyback value was at 85 billion yuan, illustrating an almost twofold increaseTypically, the motivations behind stock buybacks by public companies include reducing registered capital, funding employee stock plans or equity incentives, converting corporate bonds, and protecting corporate value and shareholder interests.

Of the reported buybacks this year, the majority have been earmarked for employee stock ownership plans or executive incentives

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In fact, 395 of the 490 buybacks announced were specifically for these reasons, amounting to around 80%. Conversely, only 42 were targeted at reducing registered capital, which represents less than 9% of the casesHowever, the landscape shifted in 2023, with a significant uptick in buybacks intended for market value management and cancellations.

For instance, the biotech company HeBang Biologics initiated five stock repurchases throughout the yearThe first of these was intended for an employee stock program, while the subsequent four were focused on supporting company value and protecting shareholder interestsAdditionally, WuXi AppTec launched three buybacks in the 10 billion yuan range, all structured as cancellation-oriented repurchases.

Data from Dongfang Caifu Choice further clarifies that, out of the approximately 1,500 stock buybacks this year, 947 were plotted for employee incentives, a notable drop from previous figures showing 80%. Meanwhile, cancellation-based buybacks increased to 262, thus doubling in representation compared to the last year’s data

Further, 268 buybacks were executed to bolster company value and shareholder rights, mirroring the broader trend toward cancellation.

An exemplary case in 2024 unfolded with Zhifei Biologicals, whose shareholders approved a buyback plan on March 2024. The company proposed utilizing its own funds to repurchase a portion of its shares via a centralized bidding method, specifically aimed at cancellations to mitigate the company’s registered capitalBy the end of March, the total buyback amounting to 300 million yuan was completed, culminating in share cancellations on April 10.

Meanwhile, Kanglong Chemical disclosed a plan in April 2024 to buy back shares similarly with intentions for complete cancellation and a subsequent reduction in registered capitalBy July, the completion of this repurchase amounted to approximately 200 million yuan.

Furthermore, a trend has emerged where over a hundred companies modified the intended use of repurchased shares to facilitate cancellations

For example, Debang Co., on December 10 announced it would be changing the purpose of its 2021 buyback from "for equity incentives" to "for cancellation and reducing registered capital." Similarly, Chongqing Steel revealed similar adjustments, linking changes in its capital strategy to protect investor interests.

As gleaned from incomplete statistics by First Financial, approximately 105 companies made announcements regarding the alteration of their repurchase purposes to include cancellations this year.

According to Zhao Yurui, Chief Investment Advisor at GF Securities, cancellation-based buybacks entail the acquisition and subsequent cancellation of shares to decrease the outstanding share countThis maneuver is instrumental in elevating earnings per share and shareholder equity, thereby enhancing the company’s financial indicators and balance sheets, ultimately translating to superior investor returns

Moreover, it wards off potential profit-taking by the company if the stock price appreciates, thereby increasing the company’s perceived value and solidifying investor confidence, which in turn can aid in the stabilization and recovery of the capital market.

Notably, Tian Lihui asserts that the significant upturn in cancellation-based buybacks can largely be attributed to the improved financial standing of firms, favorable regulatory policies, and the necessity to stabilize stock prices amid market volatilitySuch actions serve to elevate shareholder value, instill market confidence, and enhance capital structures.

He summarized, “Overall, cancellation-based buybacks have emerged as a vital strategy for companies to navigate market volatility and bolster their competitivenessHowever, vigilance against excessive buybacks, which may lead to cash flow constraints, is crucial.”

From Zhao Yurui's perspective, while these buybacks can be beneficial, they are also high in costs

Companies opting for this strategy must ensure that they possess sufficiently robust cash flows and sound financial health, alongside solid profitability.

This year, it is observable that the organizations leaning towards cancellation-based buybacks are primarily state-owned or those with substantial financial resourcesA prominent example includes Kweichow Moutai, which in September announced its first-ever cancellation-based buyback, setting aside 3 billion to 6 billion yuan for the initiativeThe aim was to buy back shares for cancellation, positioning it to become the largest cancellation-based buyback in A-shares history.

In addition, other corporations such as Jiankang Medical, Yili Group, Dongfang Yuhong, and COSCO Shipping have also disclosed repurchase plans exceeding 1 billion yuan, all intended for reducing registered capital via cancellationsThis underscores the trend of large-scale financial maneuvers among leading firms in the market.