If you are looking to invest in Suncity Group Holdings Limited’s (SEHK:1383), 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. 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.
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An interpretation of 1383’s beta
Suncity Group Holdings’s beta of 0.18 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in 1383’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, 1383 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
How does 1383’s size and industry impact its risk?
1383, with its market capitalisation of HKD HK$4.21B, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, 1383’s industry, real estate, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. 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. It seems as though there is an inconsistency in risks portrayed by 1383’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 1383’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 1383’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, 1383 doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. 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. This is consistent with is current beta value which also indicates low volatility.