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For Zhongzhi Pharmaceutical Holdings Limited’s (SEHK:3737) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. 3737 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.
Check out our latest analysis for Zhongzhi Pharmaceutical Holdings
What does 3737’s beta value mean?
With a five-year beta of 0.45, Zhongzhi Pharmaceutical Holdings appears to be a less volatile company compared to the rest of the market. This means that the change in 3737’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. 3737’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.
Does 3737’s size and industry impact the expected beta?
With a market cap of HK$1.38B, 3737 falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. But, 3737’s industry, personal products, is considered to be defensive, which means it is less volatile than the market over the economic cycle. As a result, we should expect a high beta for the small-cap 3737 but a low beta for the personal products industry. It seems as though there is an inconsistency in risks from 3737’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can 3737’s asset-composition point to a higher 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 examine 3737’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, 3737 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 3737 indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts 3737’s current beta value which indicates a below-average volatility.