For HengTen Networks Group Limited’s (SEHK:136) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. 136 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 market as a whole represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.

See our latest analysis for HengTen Networks Group

An interpretation of 136’s beta

With a beta of 1.03, HengTen Networks Group is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. Based on this beta value, 136 will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.

Could 136’s size and industry cause it to be more volatile?

With a market capitalisation of HK$27.23B, 136 is considered an established entity, which has generally experienced less relative risk in comparison to smaller sized companies. Conversely, the company operates in the luxury industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors can expect a low beta associated with the size of 136, but a higher beta given the nature of the industry it operates in. This is an interesting conclusion, since its size suggests 136 should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Can 136’s asset-composition point to a higher 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 136’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, 136 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. However, this is the opposite to what 136’s actual beta value suggests, which is higher stock volatility relative to the market.