Moutai’s record-setting run may be start of new year rally in China’s luxury liquor sector

Shares of Kweichow Moutai, one of the world’s largest liquor makers by market capitalisation and the bellwether of China’s luxury liquor industry, have been setting new records since the start of the year.

Analysts believe the demand for expensive Chinese grain liquor has begun to recover after three years of declines, boosted by factors such as restocking to replenish low inventories, rising consumption from the middle class, and the product’s appeal as a collectible investment amid inflationary expectations.

Kweichow Moutai, a state-owned producer of the top luxury brand of baijiu (literally white liquor), set a new intra-day price record at the end of last week, hitting 359.78 yuan during trading on the Shanghai stock exchange. It closed Friday at 350.76 yuan.

Two days earlier, it had surged 5.2 per cent to a record closing high of 351.91 yuan, pushing its market cap to 442 billion yuan, second only in the world to Britain’s Diageo, which owns the well-known spirit brands of Johnnie Walker and Smirnoff.

Kweichow Moutai is currently the highest priced stock in the mainland A-share market.

“The new year price rally may be triggered by anticipated demand growth in the upcoming Chinese Lunar New Year holidays,” said Wang Ying, an analyst for Hua Chuang Securities. “It’s a traditional peak season for liquor consumption in China, in particular high-end liquor.”

“In fact, the luxury liquor sector has seen an industry-wide surge in share prices,” she added.

Liquor suppliers have already raised prices in anticipation of sales growth in the holiday season. The 500ml 53 per cent alcohol Feitian Moutai, the flagship product of Kweichow Moutai, has seen its retail price jump 30 per cent to around 1,200 yuan per bottle, compared with the first half of 2016.

But some analysts believe the rally in shares may just be beginning as demand for high-end baijiu has begun to recover after years of sluggish growth due to China’s crackdown on extravagant government spending amid an anti-corruption campaign.

“The current industry inventory of high-end white liquor is at a historic low. Thus restocking will be a major factor to support the sector in 2017,” said Chen Songkun, an analyst for Industrial Securities.

In addition, the consumption upgrade by the rising Chinese middle class will drive growth, which looks set to offset the weakness in demand from luxury spending by government officials, he added.

Rising inflation in 2017 will also benefit the industry, Chen said.

“One of Moutai’s attributes is its investment value,” he said. “Individual consumers and franchisers usually stock up on the brand when expectation for inflation increases.”

Citic Securities analysts Dai jiaxian and Chen Mengyao agreed, saying Moutai purchases as “investment goods and collectibles” would boost sales growth in the new year.

Moutai produces dozens of alcoholic beverages, including Zodiac liquor, which is typically bought as a collectible and not for consumption.

“It should be noted that Chinese premium liquor products are alcoholic beverages with high alcohol content. This makes it possible to keep them in storage for long periods of time and they are believed to taste even better with age,” the Citic analysts said.

As a matter of fact, the investment return on vintage Moutai products is “quite impressive” and trading is very active, they added.

In addition, the Citic analysts noticed that consumers have started stocking up on Moutai liquor since the second half of last year in response to rising retail prices.

“We believe ample stock in the hands of consumers will not disrupt retail prices, as consumers are stocking up for the upcoming Chinese New Year later this month before retail prices rise further,” they said.

Citic Securities reiterated its Buy rating on Kweichow Moutai, with a one-year price target of 450 yuan, up almost 30 per cent from its current share price.

Industrial Securities maintained its Overweight rating on the white liquor industry. Top stock picks included Yibin Wuliangye, Luzhou Lao Jiao, and Kweichow Moutai.

“The aggregate demand for high-end white liquor is growing steadily, as the industry enters a restocking cycle after three years of adjustment, said Chen from Industrial Securities.

Kweichow Moutai and Yibin Wuliangye have successfully carried out strategies to control supplies and stabilise their sales prices, they said.

Industrial Securities expects the price-earnings ratios of Yibin Wuliangye, Luzhou Lao Jiao and Kweichow Moutai to reach 16, 21, and 20 respectively for 2017.

However, Citic Securities cited downside risks of the sector including a worse-than-expected economic downturn and the disappointing business climate for high-end liquor.