How Zhejiang United Investment Holdings Group Limited (HKG:8366) Can Impact Your Portfolio Volatility

For Zhejiang United Investment Holdings Group Limited’s (SEHK:8366) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as 8366. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.

Not every stock is exposed to the same level of market risk. A popular measure of market risk for a stock is its beta, 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.

See our latest analysis for Zhejiang United Investment Holdings Group

What is 8366’s market risk?

With a beta of 2.19, 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. According to this value of beta, 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.

SEHK:8366 Income Statement May 18th 18
SEHK:8366 Income Statement May 18th 18

How does 8366’s size and industry impact its risk?

A market capitalisation of HK$576.00M puts 8366 in the category of small-cap stocks, which tends to possess higher beta than larger companies. Moreover, 8366’s industry, construction, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the construction industry, relative to those more well-established firms in a more 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.

Is 8366’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 test 8366’s ratio of fixed assets to total assets in order to determine how high the risk is associated with 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. Thus, we can expect 8366 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. However, this is the opposite to what 8366’s actual beta value suggests, which is higher stock volatility relative to the market.

What this means for you:

You may reap the gains of 8366’s returns during times of economic growth by holding the stock. Its low fixed cost also implies that it has the flexibility to adjust its cost to preserve margins during times of a downturn. I recommend analysing the stock in terms of your current portfolio composition before deciding to invest more into 8366. What I have not mentioned in my article here are important company-specific fundamentals such as Zhejiang United Investment Holdings Group’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Is 8366’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Valuation: What is 8366 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 8366 is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.