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For Huayi Tencent Entertainment Company Limited’s (SEHK:419) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact 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. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole represents a beta 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 Huayi Tencent Entertainment
What is 419’s market risk?
With a five-year beta of 0.24, Huayi Tencent Entertainment appears to be a less volatile company compared to the rest of the market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. 419’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Could 419’s size and industry cause it to be more volatile?
419, with its market capitalisation of HK$5.06B, is a small-cap stock, which generally have higher beta than similar companies of larger size. But, 419’s industry, media, is considered to be defensive, which means it is less volatile than the market over the economic cycle. Therefore, investors can expect a high beta associated with the size of 419, but a lower beta given the nature of the industry it operates in. This is an interesting conclusion, since its size suggests 419 should be more volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is 419’s cost structure indicative of a high 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 419’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since 419’s fixed assets are only 6.80% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect 419 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.