These two Chinese baijiu makers are poised for growth, says HSBC
The outlook remains robust for high-end Chinese liquor makers despite slowing growth in food spending and stronger competition from foreign brands, according to a research report.
With other local food vendors facing headwinds, the top two baijiu makers can maintain their high profitability because of strong brand awareness, according to analysts at HSBC.
After decades of heady growth, food spending in China has reached a high level with limited room for further expansion.
The per capita consumption for many food and beverage products is now close to that of Japan and South Korea as consumers become more affluent, said HSBC analysts led by Christopher Leung.
Meantime, domestic food vendors are finding it more difficult to cater to the changing tastes of the Chinese middle class, especially with the competition from foreign brands.
However, baijiu, the expensive Chinese white spirit, is a different story.
Most Chinese buy baijiu, which can range in price from a few hundred to even thousands of yuan a bottle, as luxury gifts rather than for self consumption. The liquor, some believe, occupies an irreplaceable part of China’s networking and gift giving culture.
Baijiu makers have benefited from the rising demand for quality and brand reputation among Chinese consumers, even as pressures have mounted amid Beijing’s anti-corruption drive.
Kweichow Moutai, China’s biggest liquor maker by market value, will likely report growth in 2016 net profit of 7 per cent, following 1 per cent growth in net profit in 2015, according to HSBC estimates.
“We continue to view Moutai as a high-quality company for holding long term,” Leung said.
“It is widely regarded as the premium baijiu brand by Chinese consumers and has strong pricing power within the growing ‘premiumisation’ trend in the domestic consumer market.”
The company now looks set to increase its core Moutai liquor production by 3,000 tonnes, or 11 per cent year-on-year, to 26,000 tonnes, which will help its net profit grow 18 per cent in 2017, analysts said.
Shanghai-listed shares of Kweichow Moutai closed at 355.3 yuan at midday on Wednesday, bringing its advance since the start of the year to 6.3 per cent. HSBC has a target price on the share of 410 yuan.
The second largest baijiu maker, Wuliangye Yibin, is expected to see net profit growth accelerate to 25 per cent this year from an estimated 15 per cent in 2016, according to HSBC.
The wholesale price of its signature product 52-degree, which has an alcohol content of 52 per cent, has risen to 730 yuan (US$106.13) a bottle following a 9 per cent price hike in August.
Wuliangye plans to reduce the volume of 52-degree that it produces this year in an effort to keep prices high.
Despite a drop in volume, analysts expect company revenue to grow 10 per cent this year.
Wuliangye’s Shenzhen-listed shares ended at 40.1 yuan at midday on Wednesday, capping a 16.2 per cent rise this year.
HSBC has raised the target price of Wuliangye’s shares to 43 yuan from 41 yuan.
The company’s profitability is unlikely to be affected even if the Chinese government increases the consumption tax on Chinese spirits, as analysts expect the tax will be passed on to consumers.
Moutai and Wuliangye increased product prices by about 15 per cent in both 2010 and 2011 in response to higher consumption taxes on premium spirits.
“These concerns are being overplayed,” Leung said. “Given the strengths of the brands, we think the impact on both Moutai and Wuliangye would be at most temporary.”
Challenges faced by both companies include tightening anti-extravagance measures and a likely decline in people’s preference for the traditional Chinese liquor.
Kweichow Moutai’s plan to expand their share in the mass market with cheaper products can also prove risky.
“The mass market is very fragmented, with intense competition,” Leung said. “Moutai does not have a good record on mass market products and it could be a drag on profitability if not executed properly.”