Fundamental Stock Selection for China’s Residential Property Sector

Summary

This report develops a fundamental stock-selection method for Chinese residential property companies. It argues that presold housing can make reported profits lag actual sales, reducing the usefulness of conventional income-statement measures. It therefore tests measures based on operating cash flow, analyst consensus earnings-to-price, and quarterly sales growth. The report says traditional fundamentals showed little stable selection power, while cash-flow-based turnover, consensus earnings-to-price, and year-over-year sales growth performed better in its tests.

The proposed strategy removes companies in the lower half for cash-flow asset turnover and the lower third for sales growth, then selects higher consensus earnings-to-price stocks from the intersection, leaving holdings equal to 20% of the initial universe. Reported backtest results cover January 2009 through December 2018 and show positive excess return versus an equal-weighted property-sector index; the report also notes a 2018 drawdown alongside relative outperformance. These are historical results, and the authors caution that changing industry economics could invalidate the signals and that the strategy remains exposed to short-term market risk.

Key ideas

• Presale accounting can cause reported property-company revenue and profit to lag actual sales activity.
• The report favors operating cash-flow turnover, quarterly sales growth, and consensus earnings-to-price for sector selection.
• The strategy intersects cash-flow turnover and sales-growth screens before ranking the remaining stocks by valuation.
• The reported historical backtest outperformed an equal-weighted property-sector benchmark over its stated period.
• Changing industry structure and short-term market risk may weaken future results.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.