All You Need To Know About Emperor Culture Group Limited’s (HKG:491) Risks
For Emperor Culture Group Limited’s (SEHK:491) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not all stocks are expose to the same level of market risk, and the market as a whole 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.
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An interpretation of 491’s beta
With a beta of 1.1, Emperor Culture 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, 491 can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.
How does 491’s size and industry impact its risk?
A market capitalisation of HKD HK$710.15M puts 491 in the category of small-cap stocks, which tends to possess higher beta than larger companies. However, 491 operates in the media industry, which has commonly demonstrated muted reactions to market-wide shocks. Therefore, investors can expect a high beta associated with the size of 491, but a lower beta given the nature of the industry it operates in. It seems as though there is an inconsistency in risks from 491’s size and industry. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is 491’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 491’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, 491 seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect 491 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 491’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 491’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 491. In order to fully understand whether 491 is a good investment for you, we also need to consider important company-specific fundamentals such as Emperor Culture Group’s financial health and performance track record. I urge you to complete your research by taking a look at the following:
1. Financial Health: Is 491’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. Past Track Record: Has 491 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 491’s historicals for more clarity.
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.
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.
