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For Hao Wen Holdings Limited’s (SEHK:8019) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. 8019 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 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.
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An interpretation of 8019’s beta
With a beta of 1.61, Hao Wen Holdings 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, 8019 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 8019’s size and industry impact its risk?
8019, with its market capitalisation of HK$169.58M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the consumer finance industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the consumer finance industry, relative to those more well-established firms in a more defensive industry. This is consistent with 8019’s individual beta value we discussed above. Next, we will examine the fundamental factors which can cause cyclicality in the stock.
Can 8019’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 test 8019’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, 8019 seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect 8019 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 8019’s current beta value which indicates an above-average volatility.