For China Fortune Financial Group Limited’s (SEHK:290) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures 290’s exposure to the wider market risk, which reflects changes in economic and political factors. Not all stocks are expose to the same level 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.
Check out our latest analysis for China Fortune Financial Group
What is 290’s market risk?
With a beta of 1.12, China Fortune Financial 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. According to this value of beta, 290 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 290’s size and industry impact its risk?
A market capitalisation of HKD HK$1.18B puts 290 in the category of small-cap stocks, which tends to possess higher beta than larger companies. In addition to size, 290 also operates in the capital markets industry, which has commonly demonstrated strong reactions to market-wide shocks. So, investors should expect a larger beta for smaller companies operating in a cyclical industry in contrast with lower beta for larger firms in a more defensive industry. This is consistent with 290’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Is 290’s cost structure indicative of a high 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 290’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, 290 doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect 290 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 outcome contradicts 290’s current beta value which indicates an above-average volatility.