If you are a shareholder in Millennium Pacific Group Holdings Limited’s (SEHK:8147), 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. Not every stock is exposed to the same level of market risk, and the market as a whole represents a beta 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 Millennium Pacific Group Holdings

An interpretation of 8147’s beta

Millennium Pacific Group Holdings’s beta of 0.27 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in 8147’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. 8147’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.

How does 8147’s size and industry impact its risk?

With a market cap of HK$1.37B, 8147 falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, 8147 also operates in the electronic industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap 8147 but a low beta for the electronic industry. It seems as though there is an inconsistency in risks portrayed by 8147’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Is 8147’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 8147’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, 8147 seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect 8147 to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This is consistent with is current beta value which also indicates low volatility.