"Rolling Stones" contributed this article to NextInsight.

Listed on SGX-ST on 5 July 2007, China Sunsine Chemical Holdings Ltd. ("China Sunsine") is a leading specialty chemical producer selling rubber accelerators, insoluble sulphur and anti-oxidant and other vulcanising agents. It is the largest rubber accelerator producer in the world and biggest insoluble sulphur producer in the PRC. It continues to serve more than 2/3 of Global Top 75 tire makers, such as Bridgestone, Michelin, Goodyear, Pirelli, Sumitomo, Yokohama, Hankook, Cooper, Kumho Tire as well as PRC Tyre giants such as Hangzhou Zhongce, Giti Tyres and Shanghai Double Coin Tyre.

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China Sunsine has a share repurchase mandate which came into effect on 2 May 2022.

Since then till 18 July 2022, which amounts to 51 market days, the company had bought back its shares on 11 days.

The total: a mere 544,000 shares. This small quantity is disappointing to shareholders. 


Date

Shares bought back (A)

Total traded volume (B)

(A)/(B)

2022-07-07

50,000

172,600

30%

2022-06-28

45,000

165,800

27%

2022-06-17

50,000

218,800

22.8%

2022-06-15

50,000

185,700

27%

2022-06-09

50,000

236,900

21%

2022-05-27

50,000

178,800

28%

2022-05-25

65,000

237,500

27%

2022-05-20

25,000

95,900

26%

2022-05-19

40,000

170,200

23.5%

2022-05-18

79,000

314,900

25%

2022-05-17

40,000

120,800

33.1%

Could the tepid share buyback be traced back to a singular event in May 2020 when Sunsine received an unexpected query?

In that month, the Securities Investors Association [Singapore] (SIAS) asked Sunsine why it bought back 45% of the shares traded on 24 March 2020, as follows:

On 26 November 2018, SGX Regco, in its Regulator’s Column, had highlighted the risks in companies doing share buy-back....Also, the regulator stated that purchases that exceeded 30% of the daily on-market traded volume were excessive. Doing so may interfere with the normal trading of shares and result in the artificial inflation of the trading volume and price of the security. 

On 24 March 2020, the company bought back 282,800 shares by way of market acquisition. 624,000 shares were traded that day. Accordingly, the company accounted for 45% of the day’s trading volume.

• What is the oversight of the board on the company’s share buyback?
 Would the board be reviewing the company’s share buy-back practices (both in price and volume) to ensure that they are more in line with SGX rules? This would ensure that the company buys back shares in a responsible manner that does not artificially interfere with the price and volume of the security, as noted in the Regulator’s Column.

 

Basically, Sunsine apologised and promised to tighten procedures to comply with the 30% cap:

The Board has delegated the execution of share purchases to the CFO as he has the relevant experience and competence, and the Board's trust in discharging this responsibility. ........ our CFO estimated a maximum number of shares to buy on a particular day and then instruct our stockbroker to execute the purchase order. Based on the average trading volume of 1.32 million for 5 trading days before 24 March 2020, our CFO gave instruction to buy back a maximum of 300,000 shares, but did not anticipate or realise that the trading volume for that day was much lower. We have learnt from this episode and will advise our stockbroker to be mindful of SGX RegCo's guideline of not exceeding 30% of daily trading volume in future execution of share buybacks."


This is an unfortunate misreading of the Regulator's Column.

The same column did clarify, by way of a Q & A section, that it is not a blanket percentage limit:

"Q4: Will a share buyback that exceeds 30% of the daily on-market traded volume of the counter be considered trading misconduct?


A4: Excessive share buybacks may interfere with the trading of shares, and result in the artificial inflation of the trading volume and price of the counter in question. However, in reviewing trades for potential misconduct, RegCo takes into account various factors in addition to volume traded. Such additional factors include the manner in which orders were placed (e.g. queuing to trade vs aggressively crossing the spread) and the time of the trades (e.g. paced throughout the day or concentrated near the close of trading."


It is not clear why Sunsine did not quote the exceptions allowed to tell SIAS that its share buyback on 24 March 2020 was in order. 

The share buyback took place when the broader stock market tanked amid the panic caused by the worsening Covid-19 pandemic in China. 

The repurchase prices of 28 cents and 28.5 cents a share were at steep discounts to Sunsine's financial metrics as at the end of 2019: 

• EPS: 7.9 cents, or a PE ratio of 3.7 based on share price of 28.5 cents.

• NAV: 52 cents per share

• Cash: 26 cents per share

Why did Sunsine's management not have the presence of mind to highlight to SIAS the circumstances leading to the share buyback on 24 March 2020? 

After the issue of the Regulator's Column on 26 November 2018, Sunsine bought back more than 30% of the daily traded volume on seven occasions in May 2019:
 

 

No of shares repurchased (A)

No of shares traded (B)

(A)/(B) 

16 May 2019

131,400

363,700

36.1%

17 May 2019

200,000

649,100

30.8%

21 May 2019

274,300

635,400

43.2%

22 May 2019

471,300

555,700

84.8%

23 May 2019

423,400

891,800

47.5%

24 May 2019

168,600

445,700

37.8%

27 May 2019

230,000

388,700

59.2%

 


These buybacks, totalling 1,899,000 shares, took place on consecutive market days except 20 May (Monday). That the surge did not attract any reprimand from SGX RegCo should not have been lost on Sunsine.  

Why did Sunsine's management not reflect carefully before replying to SIAS? Did it not know that it had done no wrong? 

Its self-imposed cap since then has rendered Sunsine inactive in share buybacks.

It cannot initiate buyback because if orders are filled, subsequent transactions by other parties may not be enough to bring the repurchased shares below 30% of the total.

For the same reason, it cannot take shares offered for sale at a depressed price.

Such inaction is interpreted by investors as a lack of confidence in its own prospects. 

In contrast, many companies conduct share buybacks frequently exceeding 30% of the traded volume for the day.  (See link here)

Does Sunsine know it is the only company that shoots itself in the foot? 

Sunsine's share price has been languishing at around 43 cents, a far cry from its 70 cents NAV per share, 30 cents net cash per share, and a price-earnings ratio of 4.

Will Sunsine rescind the self-imposed 30% cap?


Share Prices

Counter NameLastChange
AEM Holdings4.500-0.120
Avi-Tech Electronics0.295-0.005
Broadway Ind0.146-0.004
China Sunsine0.4750.005
DISA0.003-0.001
Food Empire0.535-0.015
Fortress Minerals0.375-
Geo Energy Res0.395-
Golden Energy0.5000.005
GSS Energy0.0540.001
InnoTek0.4500.015
ISDN Holdings0.475-0.005
ISOTeam0.1060.005
IX Biopharma0.163-0.002
Jiutian Chemical0.090-0.001
KSH Holdings0.345-0.010
Leader Env0.056-0.005
Medtecs Intl0.180-0.001
Meta Health0.0310.001
Moya Asia0.060-
Nordic Group0.4300.005
Oxley Holdings0.175-0.005
REX International0.230-0.010
Riverstone0.7150.005
Sinostar PEC0.220-
Southern Alliance Mining0.670-
Straco Corp.0.390-
Sunpower Group0.380-0.005
The Trendlines0.096-
Totm Technologies0.123-0.001
UG Healthcare0.2150.005
Uni-Asia Group1.100-0.020
Wilmar Intl4.090-0.030
Yangzijiang Shipbldg0.935-0.010

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