Baijiu makers in China are a tipple for investors

PUBLISHED : Thursday, 12 November, 2015, 12:14pm
UPDATED : Thursday, 12 November, 2015, 12:14pm

At the top end its praised for a complex silky smoothness on the palate. At the bottom end it leaves you smelling like a carburettor. For some investment analysts it is liquid gold.

Chinese baijiu is not for the faint hearted. Yet shares in makers of this sorghum based alcohol have usually been among China’s priciest and traded above global distillery peers on a price to earnings basis. In recent years however, shares prices have taken a beating, the result of a vigorously pursued anti corruption campaign that’s dampened the market for conspicuous consumption and the government dining circuit that baijiu sales were dependant on.

The market’s leaner as a result, with better products, smarter marketing, and more keenly priced stocks, argue some analysts, who think the sector is now worth a tipple.

“(The market) is recovering after the anti corruption effort. In the long term, we expect the high-end segment to enjoy secular growth driven by product upgrading, relatively low competition due to strong brand loyalty and efficiency improvements,” wrote BNP Paribas analyst Charlie Chen in a report published this week.

About 12.5 million tonnes of baijiu were produced last year, China Annual Food Book data shows, an annualised 15 per cent increase since production levels hit a thirty five year low in 2004. Yet sales for top end brands have fallen on average every year since 2010, while sales in the low to medium price range have risen.

Chen argues this is partly the market adjusting to the slowdown in high end banquets. He is confident the middle and premium markets will favour home made spirits over imported wine and brandy.

Consolidation is expected with Kweichow Moutai, Wuliangye Yibin and Jiangsu Yanghe among the largest players in a marketplace where the top five command only 17 per cent of volume share.

While popular with analysts and investors - Kweichow Moutai has regularly been the top traded stock along the north bound stock connect - all have had their 2016 year end earnings revised lower in recent months, in the case of Wuliangye by 7.1 per cent.

Cash is building up on balance sheets, and though the larger listed distilleries have a reputation for paying out higher dividends, the assumption is the money will be use to fund further mergers, perhaps as part of government sanctioned state owned enterprise reforms.

Analysts at Credit Suisse also like the sector though there are more sanguine about the risks posed by changing consumer tastes. Younger people, the Swiss bank notes, are more health conscious and prefer drinks with lower alcohol levels. Without new product lines, that demographic shift threatens a long term hangover for the sector.

Younger adults born between 1985 and 1995, the Swiss bank notes, will account for 35 per cent of all consumption by 2020. “The transition of consumer preference may influence demand for Chinese spirits,” analysts wrote. One solution might be for baijiu makers to diversify into other product lines.