If you are looking to invest in GCL-Poly Energy Holdings Limited’s (SEHK:3800), 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. 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.

See our latest analysis for GCL-Poly Energy Holdings

What is 3800’s market risk?

GCL-Poly Energy Holdings’s five-year beta of 1.02 means that the company’s value will swing up by more than the market during prosperous times, but also drop down by more in times of downturns. This level of volatility indicates bigger risk for investors who passively invest in the stock market index. Based on this beta value, 3800 may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.

Could 3800’s size and industry cause it to be more volatile?

With a market capitalisation of HK$22.31B, 3800 is considered an established entity, which has generally experienced less relative risk in comparison to smaller sized companies. However, 3800 operates in the semiconductor industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a low beta for the large-cap nature of 3800 but a higher beta for the semiconductor industry. It seems as though there is an inconsistency in risks from 3800’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

How 3800’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 3800’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%, 3800 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 3800 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. Similarly, 3800’s beta value conveys the same message.