Yili share repurchase program: buy back 2.5%-5% of shares within 12 months, estimated to spend 10 billion!

On the evening of April 8, Yili Announced a large-scale share repurchase program, the company intends to buy back shares at a price not exceeding 35.0 yuan/share, the number of repurchases is not less than 151,953,191 shares (2.5% of the total share capital), and not more than 303,906,380 shares (5.0% of the total share capital)Within 12 months of the buyback period, the shares repurchased will be used to implement equity incentivesThe maximum amount of repurchases could reach $10.6 billion, or 38% of the company's net assetsinvestors usually take the company's buyback as a boon, and the day after the announcement, Yili's shares jumped 8.32 percentHowever, in my opinion, the Ilie share buy-back program is not only good, but rather a worrying thingthis buy-back program is too large, separated from the company's assets and operating reality, the timing is not right, logic is not clear, more likely to push up the share price of a bluff shot, no equity incentive program and a large number of buy-backs, more suspected of violationsBuffett has said that it makes sense for companies to buy back shares under certain conditions, first, the company has excess capital in addition to short-term turnaround needs, and second, the share price must be well below its intrinsic valueThe preliminary analysis ofshows that Yili shares are currently underfunded and need to borrow to complete the buybackAccording to the 2018 Company's annual report, Yili shares of cash and short-term financial management and other financial assets total 14.4 billion, operating liabilities of 7.8 billion, and then the short-term need to pay 2.5 billion payable workers compensation and 350 million taxes and fees, the company's net cash is about 3.8 billion,000 total profit (pre-tax profit) of $7.6 billion, nearly zero growth, compared with $7.58 billion in 2018, according to the company's 2019 business planAs a result, the Company's net operating cash flow for 2019 is projected to be comparable to 2018's, at $8.62 billionThe company expects capital expenditure of $2.54 billion in 2019, compared with about $6.1 billion in free cash flow for the yearApril 8, the Company implemented the completion of its 2018 dividend, paying a dividend of 4.25 billion yuanAs a result, the company can use $5.7 billion for share buybacks (net cash of $3.8 billion plus $6.1 billion in free cash flow in 2019 - $4.25 billion in dividends), which covers the lower end of the repurchase program and is not enough to cover the upper limit of 304 million shareshowever, the company's management's plans for capital spending have been ineffective over the yearsIn 2017 and 2018, the Company's real capital expenditure is multiples of the planned, as shown in the table below In fact, no company's capital expenditure has fallen below $3 billion in any year since 2011 We don't have enough reason to believe that the company's capital expenditure in 2019 will be only $2.54 billion planned, probably more than $5 billion if the company's capital expenditure exceeds 5 billion, then buyback of 152 million shares will require short-term financing of more than 2.5 billion, and the repurchase of 304 million shares will require more than 7.5 billion Fortunately, the company credit is better, short-term financing interest rate is low, about 3% The financing will result in an annual interest payment of $0.75-$225 million, or about 1.1% to 3.5% of the company's 2018 net profit Taking into account the nearly $200 million in interest income generated by holding $14.4 billion in cash in 2018, the completion of the Company's share buyback will affect annual net profit of approximately 4.1% to 7.5% (based on 2018) borrowing is secondary, the main problem is that the current valuation of the company's share price is too high, not suitable for buy-back, let alone a large number of buybacks Guizhou Maotai is the benchmark of A-share companies, earnings can be strong, products in short supply Give Guizhou Maotai 25 times the price-earnings ratio, I believe most people can accept In contrast, how much should The reasonable price-to-earnings ratio of Yili shares be? Using my method of evaluating Guizhou Maotai (quantitative scoring assessment from financial stability, competitive position, profitability, growth rate, etc.), The fair price-earnings ratio of Yili shares is 16 times The table below shows a comparison of the two companies' main evaluation indicators ignore the table above, even at 25 times Erie's fair price-to-earnings ratio, Erie's current share price is far from below intrinsic value at the April 8 closing price of 28.62, the company's current static price-earnings ratio of 27 times, according to the company's annual report 2019 operating plan, even taking into account this year's VAT downgrade and the company's profit plan, the company's earnings per share growth of 15%, 2019 forward price-earnings ratio of 23.5 times After the buyback plan was announced, the share price has jumped above 30 yuan Do not know how the company buyback maximum price of 35 yuan is assessed out, in my opinion, the company's share repurchase maximum price should definitely not exceed 19 yuan As can be seen, the company's management is quite optimistic about the company's valuation on the one hand in the business plan to put forward the prudent goal of zero profit growth, on the other hand, think that the company's market valuation can be comparable to Guizhou Maotai, should use the company's net assets of 38% to buy back shares, the company's business prospects and the company's share price of the view has such a huge contrast, I do not know whether this is schizophrenic? in the heat of the market, management is confident that the buyback of shares is written off or used for equity incentives, is typical of the destruction of value If the company really buys back shares in advance for the implementation of stock option incentives, it is to transfer risk to the company and shareholders, by reducing the incentive cost of options, reduce the difficulty of completing the performance appraisal target, damage public and private company announced that the 10 billion shares will be used to implement equity incentives, but I did not find out that the company has announced the latest equity incentive program, do not know whether this is my negligence, or the company's negligence in accordance with the relevant accounting standards, the fees incurred in the implementation of equity incentives are amortized into the company's management expenses, which raises the real growth requirements of the company's performance "For example, if the performance appraisal target is 45 per cent in three years, if the option incentive fee increases by 5 per cent per annum over the three years, the firm actually needs to achieve 60 per cent performance growth in order to meet the performance target." if the shares are repurchased in advance in case the option expires, the option incentive fee is the difference between the option exercise price and the average price of the company's share repurchase, which is much lower than the option fee calculated under the Black Scholes option pricing formula, which is only about 1/6 of the latter In this way, it is much less difficult to achieve performance appraisal objectives "However, this deprives the company of the flexibility to maximize the interests of shareholders: by opting for additional or repurchases of shares for option exercise, the company not only bears the vast majority of option costs, but also the buyback of shares is at great risk of falling prices because option holders can exercise their rights and give up when they have no economic value." In view of the Yili shares announced this buy-back program, the maximum amount of buyback can reach 38% of the company's net assets, a significant proportion, so that the company's large number of assets should not be borne in the risk of stock price volatility, not too much! in fact, this is not a good time to launch an equity incentive scheme, given the current overvaluation of Yili's share price Because whether it is an option incentive plan, or a restricted stock plan, are faced with the same problem: if the exercise price of the incentive object is too high, the incentive is small, in case the market price of maturity is not satisfactory, still can not get a hand, and if the exercise price is too low, the incentive fee is too high, increasing the performance appraisal is difficult From the way the company's 2016 equity incentive plan performance appraisal objectives, I think management and employees do not have the confidence to commit to higher performance the launch of this share repurchase program, the timing is not right, the logic is not perfect I don't think I'm smarter than executives who have decades of management experience in big companies, and how can an average investor think of a problem that would have been unthinkable? They are actually very clever, the equity incentive plan is not decided, first throw the buy-back plan, let the unknown truth of the investors clap their hands, and let the blame of public fat private is based on virtual reasoning, at any time by the company's face Yili shares are dispersed, management holdings are relatively large, have a strong say in the company, so there is no real desire to harm the long-term interests of the company (I write here that I understand how stupid I am: writing such a long article to argue that something that would never happen is risky.) , therefore, it is reasonable to speculate that the real purpose of the buy-back scheme is perhaps a short-term boost to the company's share price This is no fundamental difference from the various fancy increases, buybacks and maintenance of share prices by A-share companies since 2015 share buyback program has pushed up the company's share price, at least for some: (1) the 2016 equity incentive program has achieved 100 per cent of its performance this year The stock after the exercise of the option and the restricted stock granted are about to be sold (2) the third phase of the 2014 stock-holding plan to be sold to end, the fourth issue of this May this year the stock unlock can be sold The two stocks are in small numbers, but are involved by management (3) first to reduce the holdings of shares in the hands of the high, and then choose the opportunity to push the equity incentive plan, low-cost to get back the shares (4) If the real share repurchase is used for equity incentives, as mentioned earlier, the risk can be transferred and the performance appraisal can be reduced in difficulty because of the early hours, the announcement of a variety of withdrawals, the company may not be at a high price to buy back, but also may be a symbolic buyback point The equity incentive plan is not expected to be introduced at a time when the share price is in high spirits finally, I would also like to talk about the legality of this repurchase programme "In accordance with the relevant provisions of the Company Law and the Articles of Association of Inner Mongolia Yili Industrial Group Co., Ltd (the "Articles of Association"), the repurchase program shall take effect from the date of the resolution of the Board of Directors and shall not be submitted to the general meeting of shareholders for consideration by the company," the said in a statement Yili's share repurchase program " due to restrictions on share repurchases in the previous articles of association, in March 2019, the Company amended the Articles of Association at the 2018 Annual General Meeting to expand the share repurchase situation, see the screenshot below At the same time, the revised articles of association transfer the review power of "rewarding shares to employees of the company" in the original subparagraph (iii) from the general meeting of shareholders, and the decision of the company to make share repurchases for equity incentives, convertible bonds and the maintenance of the value of the company in the new articles of association is also transferred to the board of directors This amendment to the repurchase provisions appears to be based on the relevant documents of the CSRC, but in fact, the SFC's document surging to encourage share repurchases of companies, although allowing for the expansion of share repurchases, still stipulates that share repurchases should be conducted under the authorization of the articles of association and the general meeting of shareholders Erie's newly revised articles of association expand editing the board's powers and reducing the power of shareholders' meetings It should be noted that the "necessary to safeguard the value of the company and shareholders' rights and interests" provisionist is very false, which gives the board too much power, easy to be abused to manipulate the stock price can be speculated that the company's buyback plan was in the works ahead of the general meeting According to the revised articles of association, the Board of Directors considers that the repurchase does not require consideration by the general meeting of shareholders It is important to note that even under the new articles of association, the resolution of the Yili Board of Directors is still in violation of the law, and the share repurchase scheme should be submitted to the general meeting of shareholders for consideration according to the announcement of the repurchase program, the purpose of the repurchase includes two objectives: (1) to enhance investor confidence in the company's investment (2) For the implementation of equity incentives for subparagraph (1), it can be reluctantly attributed to subparagraph (vi) of the repurchased shares, i.e "maintaining the value of the company" The previous analysis of this article shows that there is no need to maintain the company's value The board of directors does not fully demonstrate the need to preserve the value of the company, which is an abuse of power taking into account the subjectivity of the determination of the (1) project, and even if the board's decision was barely clear, the board's decision was clearly overstepping its authority over the (2) project Although the revised articles of association stipulate that share repurchases for equity incentives may be decided by the board of directors, it is clear that such repurchases should be premised on the approval of the equity incentive plan by the general meeting of shareholders of the company Both before the amendment or the revised articles of association, it is clearly stipulated that the equity incentive plan should be considered and decided by the general meeting of shareholders The Company's 2016 equity incentive plan, which provides option stake in the option, has ended and has nothing to do with this repurchase At present, the company's shareholders' meeting has not considered and approved any new equity incentive plan, without preconditions, the board of directors can "imagine" the resolution of the shareholders' meeting as the basis for decision-making, such a large-scale share repurchase, is not in line with the articles of association to safeguard the company's value and shareholders' interests, relying on the company to maintain the competitive advantage of the market, down-to-earth management, the performance reflected in excellent financial indicators If a high price to the market can boost investment confidence, last year's pressure on brokers breathless equity pledge issue is not a problem I have no confidence in the management who used the company's share price to influence the share price to take personal gain by using the company's share price to buy back shares without the idea of zero growth in the profit plan and the lack of equity incentive plans to use the company's 38% net assets to buy back shares Of course, I would be confident if I didn't have to take responsibility for using someone else's money If management has a "firm confidence" in the value of the company, can you pay for your own increase in holdings, not the company's money? in general, my views on The Erie share repurchase program are the opposite of those of the independent directors of the Company, and I do not think it is necessary, nor feasible, for the company to buy back public shares in this way, nor is it feasible ido does not own shares in Erie