If you are looking to invest in Zhejiang United Investment Holdings Group Limited’s (SEHK:8366), 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. The beta measures 8366’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, and the broad market index 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 Zhejiang United Investment Holdings Group

What is 8366’s market risk?

With a beta of 3.07, Zhejiang United Investment Holdings 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, 8366 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 8366’s size and industry impact its risk?

8366, with its market capitalisation of HKD HK$849.60M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, 8366’s industry, construction, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. 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 8366’s beta value discussed above. Fundamental factors can also drive the cyclicality of the stock, which we will take a look at next.

Can 8366’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 examine 8366’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up an insignificant portion of total assets, 8366 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. This outcome contradicts 8366’s current beta value which indicates an above-average volatility.