If you are a shareholder in Unisplendour Technology (Holdings) Limited’s (SEHK:365), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures 365’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed 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 considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.

Check out our latest analysis for Unisplendour Technology (Holdings)

What is 365’s market risk?

Unisplendour Technology (Holdings) has a beta of 1.34, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. According to this value of beta, 365 may be a stock for investors with a portfolio mainly made up of low-beta stocks. This is because during times of bullish sentiment, you can reap more of the upside with high-beta stocks compared to muted movements of low-beta holdings.

How does 365’s size and industry impact its risk?

A market capitalisation of HKD HK$7.09B puts 365 in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, 365 also operates in the machinery industry, which has commonly demonstrated strong reactions 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 is consistent with 365’s individual beta value we discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.

How 365’s assets could affect its 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 365’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, 365 doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect 365 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 365’s actual beta value suggests, which is higher stock volatility relative to the market.