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If you are a shareholder in Wuzhou International Holdings Limited’s (SEHK:1369), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not all stocks are expose to the same level of market risk, and the market as a whole represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
See our latest analysis for Wuzhou International Holdings
What does 1369’s beta value mean?
Wuzhou International Holdings’s beta of 0.06 indicates that the stock value will be less variable compared to the whole stock market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. 1369’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
Could 1369’s size and industry cause it to be more volatile?
With a market cap of HK$2.69B, 1369 falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, 1369 also operates in the real estate industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap 1369 but a low beta for the real estate industry. This is an interesting conclusion, since both 1369’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Can 1369’s asset-composition point to a higher 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 examine 1369’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since 1369’s fixed assets are only 26.97% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect 1369 to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. Similarly, 1369’s beta value conveys the same message.