Prices of a prestigious Chinese alcohol brand are falling, stoking worries about economic growth

June 23, 2024 | 09:07am

China growth worries have hit a big alcohol stock. Why some analysts see a buy opportunity

Prices of a prestigious Chinese alcohol brand are falling, stoking worries about economic growth

Prices of a prestigious Chinese alcohol brand are falling, stoking worries about economic growth. "Flying Fairy," a 53% alcohol from Shanghai-listed Kweichow Moutai , saw wholesale prices drop by more than 5% in a week. Those prices are now down by more than 30% since a Sept. 2021 peak, Nomura analysts said in a research report, noting that during a boom in housing prices from 2015 to 2021, Flying Fairy's wholesale prices surged by nearly 360%. Also known as "Feitian Moutai," the brand of traditional Chinese baijiu liquor, made from red sorghum, is a status symbol used for government gifts and seen at high-level business deals and weddings. That's also given older bottles collector's value . It's less clear whether a decline in an apparent proxy on Chinese wealth means the company itself will be significantly hit. Wide margins Morningstar senior equity analyst Jennifer Song pointed out that Kweichow Moutai has maintained wide profit margins and that it has "plenty of room" to raise its ex-factory prices. Song said recent conversations with institutional clients revealed no change on their view of Moutai. Despite a 13% drop so far this year, Kweichou Moutai remains the largest stock by market capitalization in the Shanghai composite, making it a large part of exchange-traded funds tracking mainland Chinese stocks. By contrast, PetroChina , the second-largest company in the Shanghai composite by market value, is up more than 40% year-to-date. Stock market leaders have changed every few years, and companies on the upstream side such as in copper, coal and crude oil have recently performed well, said Ye Yuhua, manager at Guangzhou-based Liangdian Private Capital. He agreed the drop in wholesale prices won't have a big impact on Moutai's immediate earnings. But he said there is an effect on investor sentiment about the future — whether Moutai will have to reduce its supply to the market if a iglut of nventory builds, and starts getting sold in the next six to 12 months. Anecdotes about the economy haven't helped boost expectations about high-end baijiu demand. The Nomura analysts noted industry data showed existing home prices dropped 26.5% across 50 major Chinese cities from a peak in July 2021 to May 2024. Duty-free sales in the tropical Chinese island of Hainan fell in May, for a nearly 30% drop in the first five months of 2024 versus a year ago, local customs data showed. What's also different about Moutai's stock decline is that investors aren't rushing in to bottom fish as they have in the past, Ye said. Ye holds some Moutai shares and thinks the decline in price creates some opportunity. He certainly doesn't expect Moutai's social status to change. Moutai named a new chairman in late April after his predecessor took a local government position. At a shareholders' meeting last month, "the new Chairman ... emphasized respecting distributors' profit models, while encouraging them to enhance the company's reputation in return, achieving mutual growth," Huatai Financial Holdings said in a June 11 report. "We are optimistic about the company's potential, underpinned by its solid brand power and effective operations," Huatai said, reiterating its buy rating. It has a price target of 2,214.30 yuan ($304.97) on the stock. Following Moutai's first quarter report in late April, Goldman Sachs, JPMorgan and Macquarie all had price targets of at least 2,000 yuan on the stock, according to FactSet. That's more than 35% above where shares closed Friday. "The recent wholesale price drop we think is mostly triggered by the arbitragers in the market," Morningstar's Song said. She expects wholesale prices to increase in coming months given major Chinese holidays in the fall. Second-quarter weakness The second quarter is typically the weakest of the year for baijiu demand, while promotional activities around June 18 and Moutai's own efforts to reach young people have lowered the final retail price, Song said. Song also noted that demand from weddings is down because many people who adhere to traditional Chinese customs don't think this is a good year for marriage . Official Chinese data last week showed marriage registrations fell by 8.3% in the first quarter from a year ago, to 1.97 million couples, the lowest since 2020 when the pandemic hit, according to Wind Information. Song said she has not changed her earnings forecasts for what is a "slightly undervalued" stock — share prices would have to fall to 1,262 yuan for Moutai to be "significantly undervalued." Shares closed at 1,471 yuan on Friday.

This story originally appeared on: CNBC - Author:Evelyn Cheng