If you are a shareholder in Zhengye International Holdings Company Limited’s (SEHK:3363), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. 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 expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.

View our latest analysis for Zhengye International Holdings

What is 3363’s market risk?

Zhengye International Holdings’s beta of 0.6 indicates that the stock value will be less variable compared to the whole stock market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. 3363’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.

Does 3363’s size and industry impact the expected beta?

A market capitalisation of HK$970.00M puts 3363 in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, 3363’s industry, packaging, 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 packaging industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both 3363’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 3363’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 3363’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%, 3363 appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of 3363 indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what 3363’s actual beta value suggests, which is lower stock volatility relative to the market.