If you are a shareholder in Evergrande Health Industry Group Limited’s (SEHK:708), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. 708 is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.

See our latest analysis for Evergrande Health Industry Group

What is 708’s market risk?

Evergrande Health Industry Group has a beta of 2.47, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. Based on this beta value, 708 will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.

Could 708’s size and industry cause it to be more volatile?

With a market capitalisation of HKD HK$25.75B, 708 is considered an established entity, which has generally experienced less relative risk in comparison to smaller sized companies. Moreover, 708’s industry, media, is considered to be defensive, which means it is more volatile than the market over the economic cycle. It seems as though there is an inconsistency in risks portrayed by 708’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

Is 708’s cost structure indicative of a high beta?

During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I test 708’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since 708’s fixed assets are only 27.16% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. However, this is the opposite to what 708’s actual beta value suggests, which is higher stock volatility relative to the market.