podcastnewsletterAbout

What Hiring Activity Says About Firm Valuations in China

January 10, 2018
Brandon Emmerich
Granite Peak Advisory

How does an obscure factor like hiring practices impact firm valuation? That was the question posed by Deutsche Bank’s quant strategy group in a 2015 whitepaper titled, “Macro and Micro Jobenomics.” The report concluded that online job postings could be used to predict U.S. macroeconomic statistics and equity market returns. This piqued my interest – I wondered whether a similar process could be used for valuing A-share companies in China.

How does an obscure factor like hiring practices impact firm valuation? That was the question posed by Deutsche Bank’s quant strategy group in a 2015 whitepaper titled, “Macro and Micro Jobenomics.” The report concluded that online job postings could be used to predict U.S.  macroeconomic statistics and equity market returns. This piqued my interest – I wondered whether a similar process could be used for valuing A-share companies in China. I began by examining self-reported employee headcounts from listed companies.

It Takes A Village.png

Firm-level data from DataYes shows that year-on-year revenue growth correlates positively with headcount. The histogram on the left shows correlation coefficients for the 1600 A-share firms with 10 years of historical data. The chart on the right shows that the correlation between headcount and revenue growth varies by sector. Moving on to the main course, the online hiring data set I used tracks a daily average of 300,000 job postings and covers 819 A-share firms. Each observation includes a job title, location, firm name, education and experience, and pay range. To facilitate cross-company comparisons, I calculated a “hiring ratio” that divides each firm’s total number of unique job postings by employee headcount. I then tested this factor by comparing the private and state-owned sectors.

Markets Over Mao.png

Unsurprisingly, the private sector is much more active on the job market than China’s state-owned-enterprises. In fact, private firms outnumber SOEs in the data set by a factor of six, and their hiring ratio is more than double that of the SOEs. Insufficient history on Chinese hiring data precludes precisely replicating the back-test methodology of the original whitepaper. As a proxy, I examined the cross-sectional relationship between hiring ratio and firm valuations, which approximate the expectations of future profits from management and investors, respectively.

Hiring Ratio to PS Ratio.png

Controlling for sector, I found that the hiring ratio correlated positively with firm valuation. Obviously, hiring ratio isn’t the sole determinant of firm valuations in China. If it were, most of my banker friends would be out of a job. However, the results of a simple regression results appear predictive enough to warrant consideration. Of course, much more interesting than the model itself are the outliers – firms with a high hiring ratio and low valuation. The absence of evidence is not evidence of absence, so we will therefore consider only the firms with anonymously high hiring ratios. As an exercise, I sorted the 1,000 listed companies with highest market capitalization in China by their residual valuation – that is, the underestimation of price-to-sales ratio relative to hiring ratio. In other words, these are the firms that could be considered under-valued if all else were equal.

Undervalued Single Names Table.png

These findings leave two questions for further research. First, does diversity of the job postings matter? For example, do investors reward firms for hiring across the whole organization rather than just growing the sales team? Second, does average new hire wages impact valuations? That is, do investors reward firms for winning higher-priced talent, under the assumption that they will improve the bottom line?

Brandon Emmerich

Brandon Emmerich

Principal
Granite Peak Advisory
  • Principal at Granite Peak Advisory. He helps institutional investors understand China’s financial markets and economy. 
  • Additionally, his data-driven research has been cited in the Financial Times, Wall Street Journal, New York Times, and Dow Jones Newswire.

Channels

AsiaStrat
Granite Peak Advisory
Track Research
Trivium China
Gao Feng
Real Estate Foresight
China Beige Book

All Analyses by

Granite Peak Advisory

Clearing up a few misconceptions on China's capital flight

Clearing up a few misconceptions on China's capital flight

Last year, I debunked a popular measure of trade misinvoicing as the culprit for China’s capital outflows. Today, let’s scrutinize two other misconceptions bouncing around the China commentator echo chamber.

An inflection point in china's systemic risk

An inflection point in china's systemic risk

Additionally, given the incentives of regulated institutions everywhere, it is likely that risks have simply begun to migrate to new and more opaque parts of the balance sheet. As China watchers, we should prepare for yet another game of financial risk whack-a-mole.

A new framework for china's debt problem

A new framework for china's debt problem

In fact, high yields still haven’t filtered down to borrowers. Using industrial enterprise economic indicators data, I estimated the actual interest rate paid by Chinese borrowers. Over the past six months – as corporate bond yields, SHIBOR, and WMP yields all rose dramatically – the actual interest paid by China’s industrial enterprises fell to an all-time low.

China's higher rates don't matter, yet

China's higher rates don't matter, yet

In fact, high yields still haven’t filtered down to borrowers. Using industrial enterprise economic indicators data, I estimated the actual interest rate paid by Chinese borrowers. Over the past six months – as corporate bond yields, SHIBOR, and WMP yields all rose dramatically – the actual interest paid by China’s industrial enterprises fell to an all-time low.

China's stock markets—are there any patterns?

China's stock markets—are there any patterns?

'I find evidence for dramatic size and momentum effects; that is, small stocks and recent winners are the top performers in China’s stock market. Additionally, I find that high-beta stocks modestly underperform low-beta stocks.'

Predicting Chinese stock returns

Predicting Chinese stock returns

Outside observers paint China’s stock markets as a casino, where picking stocks requires as much skill as roulette, and investors avoid the country in their portfolio allocations. Patterns exist, however, if you know where to look.

China's unsolved liquidity risk

China's unsolved liquidity risk

The question we should ask ourselves is, how many of China’s corporate borrowers are paying off existing debt with new debt?

Novel Data on China's Mortgage Loans

Novel Data on China's Mortgage Loans

China’s banks are directed by the state, without irony, to “vigorously promote reasonable home ownership.” Their most recent annual reports repeatedly bury in the notes this line, or some variant of it, as an explanation for the explosion of mortgage lending over the previous 12 months. Granular mortgage data however, is hard to come by – so we created a process to collect, clean, and interpret that information.

Novel Data on China's Auto Loans - An Inefficient Market

Novel Data on China's Auto Loans - An Inefficient Market

The continued growth of China’s auto sales has relied increasingly on consumer credit, according to the WSJ; but, granular data is hard to come by. So, we created a process to collect, clean, and structure data from online auto loan offerings. Our findings imply that the auto loan market, like many credit markets in China, runs on two parallel tracks, and is woefully inefficient.

What Hiring Activity Says About Firm Valuations in China

What Hiring Activity Says About Firm Valuations in China

How does an obscure factor like hiring practices impact firm valuation? That was the question posed by Deutsche Bank’s quant strategy group in a 2015 whitepaper titled, “Macro and Micro Jobenomics.” The report concluded that online job postings could be used to predict U.S. macroeconomic statistics and equity market returns. This piqued my interest – I wondered whether a similar process could be used for valuing A-share companies in China.

Brandon Emmerich

Brandon Emmerich

Principal
Granite Peak Advisory
  • Principal at Granite Peak Advisory. He helps institutional investors understand China’s financial markets and economy. 
  • Additionally, his data-driven research has been cited in the Financial Times, Wall Street Journal, New York Times, and Dow Jones Newswire.
Granite Peak Advisory

Granite Peak Advisory

Channels

AsiaStrat
Granite Peak Advisory
Track Research
Trivium China
Gao Feng
Real Estate Foresight
China Beige Book
tp = window.tp || []; tp.push(["https://id.tinypass.com/id/api/v1/identity/login/social/callback", true ]); tp.push(["setTags", ["Macro"]]);