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Baijiu price rebound bodes well for liquor makers, analysts say

PUBLISHED : Thursday, 22 December, 2016, 4:44pm
UPDATED : Thursday, 22 December, 2016, 9:39pm

Looking for a seasonally themed investment idea? How about buying shares in high-end liquor makers as both consumer demand and prices for spirits are expect to climb ahead of the Lunar New Year.

“December is the peak season for the pricey Chinese hard liquor baijiu,” said Pan Fan, an analyst at SWS Research, adding that the spirit is traditionally given as a gift in the mainland during the spring festival.

Baijiu prices fell to a multi-year low early this year amid excess capacity and a slump in consumption amid President Xi Jinping’s anticorruption campaign.

The price slump helped to spark a wave of industry consolidation, Pan added.

The most watched indicators tracking the liquor segment showed that wholesale prices of the primary Kweichow Moutai Feitian have risen 100 yuan (HK$112) each month since June this year, climbed to 1,000 yuan per bottle by the end of October – typically an off season for liquor sales.

Retail prices jumped to 1,099 yuan per bottle as of December 21, according to the country’s second-biggest web-based retail platform JD.com. The retail price of Moutai could reach 1,200 yuan per bottle, according to one analyst estimate.

“Mass consumption upgrading will continue as one of the segment’s drivers in the coming year,”said Dai Jiaxian, an analyst at Citic Securities.

“We foresee additional highlights like restocking demand in anticipation of price hikes, super high-end liquor again being valued as an investment good, and growing liquor consumption on business occasions.”

State-controlled alcohol producer Kweichow Moutai, listed in Shanghai, reported net profit of 12.47 billion yuan in the first three quarters, up 9.1 per cent compared to the same period last year. Revenue for the period grew 15 per cent to 26.63 billion yuan.

Operating revenue of Kweichow Moutai in the fourth quarter is forecast to grow 29 per cent on year to 12.28 billion yuan, nearly half of the revenue recorded in the first three quarters, said CICC analyst Xing Yingzhi in a recent research report.

Kweichow Moutai has an operating revenue target of 60 billion yuan for next year, up nearly 20 per cent year on year.

“The aggressive target implies that the company has become more optimistic that its 2017 sales and earnings will deliver decent growth without raising prices,” Xing said.

“We expect the company’s sales and earnings growth in 2017 will be faster than 2016.”

The firm plans to release a smaller-than-expected 4,000 tonnes of the spirit to market next year, about a third less than earlier calculations by analysts.

Another liquor maker, Shenzhen-listed Wuliangye Yibin, is also recommended by analysts who said the recent approval of a private placement is positive for the company.

Market regulators last week approved Wuliangye’s proposal to issue shares privately to employees, distributors and strategic investors.

“The industry is rebounding,” Pan said.

Wuliangye reported a profit of 5.1 billion yuan in the first three quarters, up 10.8 per cent year on year. The company’s super premium product Wu Liang Ye Puwu has seen its wholesale price rise to 739 yuan per bottle in December, up 21 per cent from 609 yuan per bottle in 2015. Further price gains are expected as the company said it will cut Puwu’s production by 25 per cent bext year.

Kweichow Moutai’s Shanghai-listed shares were up 44.77 per cent this year to HK$328.66 as of Wednesday’s close, representing a price-earnings ratio of 23.7 times. As of Wednesday, Wuliangye Yibin’s Shenzhen-listed shares are up 28.67 per cent this year to 35.63 yuan, a PE ratio of 19 times.

Pan said the PE ratio will drop as earnings increase alongside rebounding sales.

“The investment opportunities will be more attractive with lower valuation,” Pan said.

The annual Lunar New Year holiday will officially get underway on January 28, 2017.

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