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Buy-backs tipped as the way forward.

Some Hong Kong firms are being encouraged to buy back shares to trim their capital bases and boost profitability and dividend payouts.

The strategy, reminiscent of some British and US companies, could run out of steam in the long run, though.

"A number of companies are clearly over-capitalised and one means to enhance return on equity would be for these companies to re-purchase their own shares or increase dividends," said Merrill Lynch's head of Hong Kong research, Mr Adrian Faure.

This method is last on Mr Faure's list of measures - cost cutting, mergers with synergies and technology benefits, overseas diversification - to boost profitability.

"It is artificial, but it is important for the signal that it sends," Ms Bethany Chan, head of research at Worldsec International, said. "If a company buys back its own shares, that indicates that it sees value there."

That is a good short-term signal, but for the longer term, management should seek to achieve the most efficient capital structure to boost profitability, equities analysts said.

"Each company is different. Each has to find its own sweet spot," Morgan Stanley strategist Mr Markus Rosgen said.

That sweet spot is the most tax efficient combination of debt and equity to fund its operations and give shareholders the highest return on their investment.

Companies that had achieved their earnings targets, reached the limits of local expansion or were severely restricted in overseas markets, such as utilities and banks, could return surplus capital to shareholders, Mr Rosgen said.

In some cases it would mark the company as "mature" and in others mean only that it could not find expansion opportunities in the short term.

"Many of these companies still have ten or 15 per cent earnings growth but they may have too much cash in the business," he said.

In terms of ROE, Hang Seng Index companies reported peak profitability in 1995 with an aggregate 20.4 per cent. This ratio has fallen steadily since, to 13.7 per cent in 1998 and to a forecast 13.2 per cent in 1999.

Overseas companies are attentive to their shareholders' demands for a steady payout ratio, but many Hong Kong companies still have some way to go.

"Asian companies, in particular some red chip companies, have been taken off clients' lists because they don't understand this concept," said Mr Anthony Burpee, London-based sales director for DBS Securities.

"It is definitely our clients' feeling that Asian management repeatedly ignores minority shareholders' interests."

Red chips, or China plays in the Hang Seng Index, had among the lowest payout ratios in 1998. China Telecom (Hong Kong), which was listed in October 1997, did not pay a dividend on its 1997 or 1998 earnings.

First Pacific paid out just 3.8 per cent of earnings despite a 70 per cent rise in 1998 earnings, holding on to its cash to fund its regional, post-crisis acquisition drive.

The highest payout ratios in 1998 were announced by HSBC Holdings subsidiary Hang Seng Bank with 96.4 per cent and Wheelock and Co subsidiary Wharf (Holdings) with 92.9 per cent.

Buying back shares was definitely a good strategy for some firms, such as power producer CLP Holdings, Mr Faure said.
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Author:Kearney, Kathleen
Publication:The Birmingham Post (England)
Date:Jul 31, 1999
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