Research Alert: China Fundamentals

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by Vinesh Jha, ExtractAlpha founder and CEO

The ExtractAlpha earnings surprise model suggests that fundamentals in China are even more dire than the sell side thinks.

With the recent turmoil in the China A Shares market, it seems that sell side analysts have reason to be skeptical about the fundamental strength of corporate earnings in the Mainland.  But is even *more* skepticism warranted? 

Here we look at ExtractAlpha’s TrueBeats, which is a model designed to predict earnings surprises, and which has been consistently accurate across global markets.  The model builds its predictions by focusing on the analysts with the best track records; by looking at surprise trends in companies and their peers; and by measuring corporate management behavior through metrics like guidance and late reporting. 

If we see a negative TrueBeat value for a particular company, our model is expecting earnings to come in even lower than the typical analyst forecast.  This is pretty rare in most markets, where management sandbagging and analyst-company relationships help to engineer positive earnings surprises for most companies.

The chart below plots the average TrueBeats values across all liquid A Shares for the last 21 years.  The sell side has been consistently too optimistic on China since about 2011, with a secular downtrend, and there’s been an acceleration recently. Our model predicts that even the *average* A Share name will come in 4% below sell side forecasts lately.  That’s the lowest in the last 20 years! 

It’s similar in magnitude and also Z-score (relative to a 5 year moving average) to what we saw in the last major turmoil back in late 2015 – early 2016. 

A research piece we published last year showed that TrueBeats, aggregated to the country or industry level, can be effective tools in systematic asset allocation. Please contact us with any questions.

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Chloe joined ExtractAlpha in 2023. Prior to joining, she was an associate director at Value Search Asia Limited. She earned her Masters of Arts in Global Communications from the Chinese University of Hong Kong.

Matija Ratkovic

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Jackie Cheng, PhD

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Willett Bird, CFA

Prior to joining ExtractAlpha in 2022, Willett was a sales director for Vidrio Financial. Willett was based in Hong Kong for nearly two decades where he oversaw FIS Global’s Asset Management and Commercial Banking efforts. Willett worked at FactSet, where he built the Asian Portfolio and Quantitative Analytics team and oversaw FactSet’s Southeast Asian operations. Willett completed his undergraduate studies at Georgetown University and finished a joint degree MBA from the Northwestern Kellogg School and the Hong Kong University of Science and Technology in 2010. Willett also holds the Chartered Financial Analyst (CFA) designation.

Julie Craig

Julie Craig is a senior marketing executive with decades of experience marketing high tech, fintech, and financial services offerings. She joined ExtractAlpha in 2022. She was formerly with AlphaSense, where she led marketing at a startup now valued at $1.7B. Prior to that, she was with Interactive Data where she led marketing initiatives and a multi-million dollar budget for an award-winning product line for individual and institutional investors.

Jeff Geisenheimer

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