If you are looking to invest in DreamEast Group Limited’s (SEHK:593), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. The beta measures 593’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, and the broad market index represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.

See our latest analysis for DreamEast Group

What does 593’s beta value mean?

DreamEast Group’s beta of 0.82 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in 593’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. Based on this beta value, 593 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.

Does 593’s size and industry impact the expected beta?

A market capitalisation of HK$2.58B puts 593 in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the real estate industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the real estate industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both 593’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.

Is 593’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 593’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, 593 seems to have a smaller dependency on fixed costs to generate revenue. 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. Similarly, 593’s beta value conveys the same message.