If you are looking to invest in Sino Haijing Holdings Limited’s (SEHK:1106), 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 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.
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An interpretation of 1106’s beta
Sino Haijing Holdings’s five-year beta of 1.08 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. According to this value of beta, 1106 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 1106’s size and industry cause it to be more volatile?
1106, with its market capitalisation of HK$1.95B, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the packaging industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This supports our interpretation of 1106’s beta value discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
How 1106’s assets could affect its 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 1106’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, 1106 seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect 1106 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. However, this is the opposite to what 1106’s actual beta value suggests, which is higher stock volatility relative to the market.