China stock market

Is the party over for Chinese consumer stocks as foreigners bail out of Moutai and Credit Suisse turns bearish on sector

Figures suggest Moutai’s profit growth no longer supports its current valuation of 567.7b yuan – almost half the annual GDP of its home Guizhou province

PUBLISHED : Monday, 29 May, 2017, 12:10pm
UPDATED : Monday, 29 May, 2017, 10:57pm

Alarms bells are ringing for investors and analysts bullish on Kweichow Moutai, and other Chinese consumer stocks.

While the Shanghai-listed shares of the liquor giant continued to set new highs in May, foreign investors have turned into net sellers of the stock through the Stock Connect programme over the past two months, and Credit Suisse Group now says it has become cautious on the sector as a whole, concerned valuations have been allowed to outpace earnings growth potential.

The bearish murmurings have surfaced as a gauge tracking Moutai and other consumer companies outperformed all other industry groups this year, advancing 12 per cent.

Financial deleveraging, uncertain economic recovery and stretched valuations of small-caps have also prompted investors to shift to large companies with more secure growth prospects since the start of the year.

Consumer stocks are now trading at the most expensive level against the CSI 300 index

of the 300 biggest stocks in the Shanghai and Shenzhen bourses since at least 2013.

“The room for absolute returns is limited because the sector’s gain has been significant this year and its future growth is limited,’’ said Shi Minjia, a fund manager at HFT Investment Management with US$6.3 billion in asset.

Shi added he is now tipping new-energy and electronics stocks, amid rising demand for electrical vehicles and smart phones.

“Moutai and other consumer stocks are losing their appeal, as valuations become more expensive,” added Wang Zheng, chief investment officer at Jingxi Investment Management.

Moutai has gained 35 per cent this year, as sales of high-end liquor have been recovering from a two-year slump spurred by President Xi Jinping’s austerity campaign. Smaller rivals Wuliangye Yibin and Luzhou Laojiao have climbed more than 40 per cent this year so far.

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The rally has taken its shares to 27 times estimated earnings for 2017. Full-year earnings for the company are being tipped to rise 25 per cent this year, accelerating from a 7.8 per cent growth last year, according to data compiled by Great Wisdom.

Its market capitalisation stands at 567.7 billion yuan (US$82.83 billion) – that’s almost half the annual gross domestic product of Guizhou province, where the company is based.

Chen Li, a strategist at Credit Suisse, said Moutai’s profit growth no longer supports the current valuation, recommending investors switch to cheaper home-appliances, and banking and insurance shares that stand to benefit from rising funding costs amid the crackdown on financial leverage.

Overseas investors sold 233.8 million yuan more Moutai shares than they bought in April through the Stock Connect scheme, following net sales of 1.7 billion yuan the month earlier, according to data from the Hong Kong exchange.

Alex Werno, executive vice general manager at Fortune SG Fund Management, argues Moutai remains a strong long-term bet, however, as the liquor maker’s compound annual growth rate may reach 30 per cent through to 2020, and its dividend payouts steadily increase.

Brokerages including Haitong Securities and China Merchants Securities maintain have “buy” ratings on the stock, with price targets representing at least an 11 per cent gain from the liquor maker’s latest closing price. The shares added 0.3 per cent to 451.92 yuan on Friday, less than 1 per cent from its record closing price, on May 23.

Moutai overtakes Diageo as world’s most valuable liquor firm

Trading in the wider consumer sector also appears to have become too crowded for some investors.

Meanwhile, major shareholders in the market’s favourites have already begun paring back their interest in the companies, taking advantage of a surge in stock prices.

Midea Group’s controlling shareholder He Xiangjian, for instance, sold 32 million shares in the nation’s biggest appliances maker for 1.1 billion yuan this month, while 12 senior executives from Hangzhou Robam Appliances, a kitchen appliance industry leader, sold combined 2.8 million shares for 108 million yuan, according data from the Shenzhen exchange.

Midea has dropped 1.8 per cent since its record close on May 23, paring back its annual gain to 31 per cent, and Robam is down 5.9 per cent from an all-time high in April, trimming its advance to 48 per cent in 2017.