Should You Have China First Capital Group Limited’s (HKG:1269) In Your Portfolio?
If you are looking to invest in China First Capital Group Limited’s (SEHK:1269), 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 1269’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. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
View our latest analysis for China First Capital Group
An interpretation of 1269’s beta
China First Capital Group’s beta of 0.75 indicates that the stock value will be less variable compared to the whole stock 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. Based on this beta value, 1269 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could 1269’s size and industry cause it to be more volatile?
1269 has a market capitalization of HK$21.73B, putting it in the category of established companies, which are found to experience less relative risk compared to small-sized companies. However, 1269 operates in the auto components industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors can expect a low beta associated with the size of 1269, but a higher beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests 1269 should be more volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is 1269’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 1269’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Considering fixed assets account for less than a third of the company’s overall assets, 1269 seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect 1269 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. Similarly, 1269’s beta value conveys the same message.
What this means for you:
You may reap the benefit of muted movements during times of economic decline by holding onto 1269. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. In order to fully understand whether 1269 is a good investment for you, we also need to consider important company-specific fundamentals such as China First Capital Group’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
Financial Health: Is 1269’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.
Past Track Record: Has 1269 been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of 1269’s historicals for more clarity.
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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
