Friday, 10 August 2012

China’s downturn-proof booze makers hit government wall

The makers of China’s fiery liquor baijiu, a pricey, potent drink that is a staple at state dinners, say it inspires poets and can even ward off dementia.

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Guanyu 道 said...

China’s downturn-proof booze makers hit government wall

10 August 2012

The makers of China’s fiery liquor baijiu, a pricey, potent drink that is a staple at state dinners, say it inspires poets and can even ward off dementia.

For investors in the largest baijiu makers Kweichow Moutai Co Ltd and Wuliangye Yibin Co Ltd, the appeal is more mundane: the companies paid out huge dividends and raised earnings forecasts when a slowing economy had prompted dozens of Chinese firms to issue profit warnings.

Demand for high-grade liquor at state banquets and premium pricing helped Moutai post an operating profit margin last year that was more than double that of tech giant Apple Inc, the world’s most valuable company, Thomson Reuters data shows.

Moutai is even a partner of the Chinese Olympic Committee, pushing out a commemorative brew for the London 2012 games.

But the stellar first-half results that these companies are expected to report this month - Moutai on Friday and Wuliangye on August 20 - may mark the high point if Beijing cracks down on lavish baijiu-drenched banquets.

Premier Wen Jiabao pledged in March to ban the use of public funds for luxury items including baijiu, which retails for about US$300 per standard bottle and well into the thousands for rare, aged varieties.

“It really depends on how strongly the government would like to execute this policy,” said Melinda Zhang, a manager in the consumer and retail practice at the consultancy Booz & Co, who has studied the baijiu sector.

“In the long term, we see the China baijiu market keeping stable growth,” she added. “The demand is there. Consumption behaviour of businesses and the government will not have significant change.”


At the five-star Okura Garden Hotel in Shanghai, a top banquet venue, the beverage manager, surnamed Liao, said baijiu sales had dropped more than 20 per cent since March.

In Tianjin, a bustling port city near the capital Beijing, Moutai sales were down by as much as 50 per cent over the past half year, the official China Daily reported in late July.

Some localities have introduced their own rules, like prohibitions on drinking at lunch, to improve the image of government officials. In Jiangsu province’s Siyang county, public expenditures on receptions had been cut by two-thirds, the Shanghai-based Oriental Morning Post reported.

The clamp-down on government profligacy, a hot-button issue in China where ordinary people sometimes associate officialdom with boozy banquets and corruption, comes ahead of the sensitive once-in-a-decade political transition later this year.

Yet fund managers and sell-side analysts have remained almost uniform in their bullishness on Moutai and Wuliangye, in part premised on the companies’ ambitious earnings guidance. Wuliangye is predicting a 51 per cent jump in first-half profit.

Of the 22 analysts tracking Wuliangye, 21 rate it a ‘strong buy’ or ‘buy,’ according to Thomson Reuters StarMine. For Moutai, 17 of 18 have a ‘buy’ or ‘strong buy’ rating.

While onshore Chinese stock markets have tanked 33 per cent over 2010 and 2011, Moutai has been a standout outperformer, surging 25 per cent. Wuliangye rose a more modest 3.6 per cent.

In 2012 so far, Shanghai-listed Moutai is up 35 per cent, while Shenzhen-listed Wuliangye is up 14.2 per cent. This compares with a 2.8 per cent gain in the CSI300 Index of the top Shanghai and Shenzhen listings.

“In the awful (stock) market conditions of the last two-and-a-half years, the outperformance of baijiu stocks has got to do with their earnings visibility,” said Cao Xuefeng, head of research at Huaxi Securities in Chengdu. “Growth for the sector will stay high, but rates of growth will slow down.” Moutai and Wuliangye currently trade at 16.6 and 13.2 times their respective forward 12-month earnings, at the low end among shares of companies classified as “consumer staples” in China.

Wuliangye did not respond to repeated interview requests and Moutai declined to comment for this story. - REUTERS