Across The Border

Cheers! China’s high-end liquors see rebound after four years of anti-graft gloom

China’s high-end liquor industry is coming back after nearly four years of downturn in the wake of government anti-corruption campaigns.

PUBLISHED : Friday, 06 May, 2016, 2:43pm
UPDATED : Friday, 06 May, 2016, 2:43pm

China’s high-end liquor industry is reviving after nearly four years of struggle under domestic anti-corrruption campaigns.

Demand is being driven by mid- and high-end consumers.

“It is the third round of a bull run after 2004 and 2009 because demand is exceeding supply again,” Wang Yongfeng, a Beijing-based A share liquor analyst at GF Securities, said.

Among 18 liquor producers listed on the A share market, 15 recorded double-digit net profit growth for the first quarter this year compared with a year earlier, beating the already positive forecasts from mainland analysts.

State-controlled alcohol producers Kweichow Moutai, listed in Shanghai, and Shenzhen listed Wuliangye Yibin saw quarterly prepaid income hit a three-year high.

China’s efforts to dampen government spending on official receptions, vehicles and overseas trips since 2012 has reduced demand for luxurious liquor — a typical choice for a gift or drink at a feast — by over 20 to 30 per cent, Wang said.

The retail price of Moutai hit 2,000 yuan (HK$2 387.4) a bottle)in 2011. It now sells at around 800 to 900 yuan.

It is the third round of a bull run after 2004 and 2009 because demand is exceeding supply again
Wang Yongfeng, a Beijing-based A share liquor analyst at GF Securities

Analysts said socially-drunk liquor consumption, especially from people in the mid- to high-income brackets is fueling the recovery.

Lv Chang, SWS Research senior analyst of food and beverages, said the over 50 per cent drop in liquor prices over the past years has stimulated demand from individuals and businesses and that has offset the decline in government spending.

“Government spending used to make up one third of demand in the past, but now it has reached a very low level. The demand from mass consumption is rising. The overall consumer structure is more solid and healthy,” Lv said.

China’s average disposable income per capita surged 8.9 per cent year on year in 2015. The economy grew 6.9 per cent year on year, data from National Bureau of Statistics showed.

People with more than 200,000 yuan annual disposable income will keep a growth rate of 10 per cent per annum in coming years. They will boost the sale of high-end liquors that are priced over 600 yuan a bottle, GF Securities said in a research report.

In 2015, the sales volume of China’s three most popular high-end liquors — Moutai, Wuliangye and Luzhoulaojiao — recovered to levels seen in 2012, according to the SWS report, despite China cutting its budgets for the three official expenditures by 11.7 per cent last year, according to government data.

“Demand and supply rebalanced last year after three years of adjustment,” Wang said. “The most important signal is the rise in the price of liquor.”

Inventories of liquors for sale, which was above one year in past three years, have been fully taken up by the market. Moutai had nearly no inventory as of end-March and that of Wuliangye was only two to three months, according to a report by Zhongtai Securities.

“Liquor makers still control the supply volume strictly. Firms like Wuliangye have expressed a willingness to further raise the price,” Lv from SWS said. He said expectations are for both sales volume and prices to rise.

“This round of cyclical recovery has just started and can last five years,” GF’s Wang said.

Liquor is a part of China’s traditional culture, thus the industry, in contrast to wine and dairy, has a natural barrier against exported goods, Lv wrote in a note.

The middle-aged population — the main fans of liquors — is sustainable while demand from young adults is growing too, Lv said.

“Some said that the over-80s and over-90s all turn to wine and do not drink liquor anymore. That’s too pessimistic and is not really the case,” Lv said.

Low valuations of leading liquor stocks on the mainland and expected profits has attracted overseas asset managers. Merrill Lynch International, Citigroup Global Markets and Oppenheimer Funds, invested in Wuliangye through Qualified Foreign Institutional Investor (QFII) to become its top ten shareholders.

Moutai’s A shares have gained 17.4 per cent to 256.21 yuan so far this year, while that of Wuliangye advanced 12.4 per cent to 30.66 yuan as of May 4. Wang from SWS expects Moutai’s price-to-earnings ratio to catch up with its global peers to more than 20 times.

The biggest risk for the industry is a possible increase in consumption tax, but the government has not made its intentions of a change clear yet, Wang said.

China’s domestic retailers, such as department stores, restaurants and liquor stores, suffered a down cycle in the past three years amid the government’s anti-corruption campaign. Operators had to cut prices and destock inventories, said Lillian Chiou, corporate ratings director at S&P Global Ratings.

“But as both economy and household consumption are still growing, when the destocking completes, we will see some sectors recover again,” Chiou said.