As Kweichow Moutai’s huge run-up leaves investors giddy, sobering signs suggest the party could be coming to an end

Kweichow Moutai’s rapid run-up takes the stock to the biggest-ever premium to the price target set by analysts

US research firm Morningstar says the stock is richly valued and sets a price target that implies a 34 per cent drop from the current level

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Kweichow Moutai is always one of the most heavily traded stocks on the trading link between Hong Kong and mainland China. Photo: Simon Song

Published: 7:00am, 8 Jun 2020Updated: 7:08am, 8 Jun 2020

Is “last call” coming for the big run-up in the share price of Kweichow Moutai, the fiery Chinese liquor maker that has soared 43 per cent in less than three months?

Some signals and a red flag raised by US research firm Morningstar suggest the stock – always one of the most heavily traded on the trading link between mainland China and Hong Kong – may be due for a correction.

The stock is trading at its widest margin ever above the consensus price target of analysts tracked by Bloomberg. One yardstick – the price-to-earnings ratio – shows its valuation has topped a level that is seen as a historical warning over the past decade that a run-up is poised for a pause.

The rapid gain in Kweichow Moutai and its elevated valuations have put analysts at odds over how to value the stock fairly.

Morningstar argues that the shares are already overvalued because of unsustainable profit growth amid the economic downturn, while JPMorgan Chase says that the valuation will be underpinned by the prospect of price increases and the expansion of the company’s direct sales network.

Kweichow Moutai rose 1.2 per cent to a record high of 1,425 yuan on Friday, compared with the 12-month consensus price target of 1,389.03 yuan by Bloomberg-tracked analysts. The gap between the two was the widest-ever on June 1, implying that the stock exceeded the analysts’ price target by the most on record. The stock trades slightly above 35 times estimated earnings, a level that Kweichow Moutai has never beaten over the past decade.