If you are looking to invest in S Culture International Holdings Limited’s (SEHK:1255), 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. 1255 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 broad market index 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.
View our latest analysis for S. Culture International Holdings
What is 1255’s market risk?
S. Culture International Holdings’s beta of 0.71 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in 1255’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, 1255 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does 1255’s size and industry impact the expected beta?
With a market cap of HK$748.00M, 1255 falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, 1255 also operates in the specialty retail industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the specialty retail industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both 1255’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.
How 1255’s assets could affect its 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 1255’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, 1255 appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. Thus, we can expect 1255 to be more volatile in the face of market movements, relative to its peers of similar size but with a lower proportion of fixed assets on their books. However, this is the opposite to what 1255’s actual beta value suggests, which is lower stock volatility relative to the market.