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If you are looking to invest in Hua Lien International (Holding) Company Limited’s (SEHK:969), 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. 969 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. Not all stocks are expose to the same level of market risk, and the broad market index represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
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What does 969’s beta value mean?
Hua Lien International (Holding)’s beta of 0.23 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in 969’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, 969 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could 969’s size and industry cause it to be more volatile?
969, with its market capitalisation of HK$284.85M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, 969 also operates in the commercial services 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 commercial services 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 969’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 969’s cost structure indicative of a high beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test 969’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%, 969 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 969 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 969’s actual beta value suggests, which is lower stock volatility relative to the market.