China Liquor Maker Shaken by Xi Becomes Top Foreign Stock Pick

Maotai, China's national wine, is under unprecedented sales

Kweichow Moutai liquor.

Photographer: Zhang Peng/LightRocket via Getty Images
  • Kweichow Moutai seen posting 7 percent annual profit increase
  • Valuation remains lower than peers as shares advance

Kweichow Moutai Co., the maker of China’s most famous premium liquor, has become a top pick for foreign funds seeking value stocks.

The company’s shares, among Shanghai’s top performers under former Chinese President Hu Jintao, received a drubbing in 2013 when Xi Jinping came to power and clamped down on lavish spending by party cadres. Still, Kweichow Moutai’s profit grew that year, and every other year since the firm listed in Shanghai in 2001. Prices of its 106-proof spirit are now more affordable to the wider public, while the stock’s once-buoyant valuation is lower than peers.

“The brand has transitioned to have broader appeal given the lower prices post anti-graft campaign," said Zoey Zuo, an analyst at Waddell & Reed Financial Inc. who produces research for the Ivy International Core Equity Fund in Kansas, Missouri, which first purchased Moutai shares in early 2014. “It’s not easy to replace Chinese white liquor on a Chinese dining table."

The distiller, which makes a strong-tasting, sorghum-based liquor, was the most actively traded stock in February through the Hong Kong exchange link. The company will probably announce Wednesday that net income rose 7 percent in 2015 from a year earlier, data compiled by Bloomberg show. Moutai is among the top 10 gainers on the CSI 300 Index this year, building on 2015’s 27 percent advance. Zuo is forecasting Moutai shares will climb a further 19 percent in the next 12 months.

Moutai stock worth 1.98 billion yuan ($305 million) changed hands through the Hong Kong-Shanghai bourse link in February, overtaking dual-listed Ping An Insurance (Group) Co. that held the top spot for at least a year, exchange data show.

Lower Prices

Before Xi unleashed his anti-corruption crackdown, Chinese officials accounted for about a third of the nation’s high-end liquor consumption, according to Fortune CLSA Securities Ltd. A bottle of Moutai now costs about 950 yuan, down from some 2,000 yuan at its peak, with distributors, not the company, absorbing the price cuts, according to Baijing Yu, who manages the Comgest Growth Greater China fund.

Sichuan Swellfun Co. and Luzhou Laojiao Co. either reported falling annual income or losses since Xi came to power, while their shares are down at least 13 percent this year. Wuliangye Yibin Co., Moutai’s biggest competitor in China, has declined 3 percent.

"Moutai is one of the few homegrown brands that command a very high brand recognition by consumers in China," said Yu. “Right now the valuation obviously has recovered, and at this juncture it’s not as cheap as what it was. But even today at this price it’s fair to hold -- we already built up a decent stake in the name."

Relative Value

The company trades at 18.3 times reported earnings, data compiled by Bloomberg show. While that’s double the level it sank to in early 2014, it trails the 27 average multiple of mainland-listed brewers and distillers with a market value of at least $1.5 billion. A Bloomberg gauge of global alcoholic-beverage producers is priced at 21.4 times profits.

Moutai stands to benefit from increasing spending by Chinese citizens, even as the economy slows, according to Charlie Awdry, London-based portfolio manager at Henderson Global Investors Ltd.

Buoyed by healthy wage gains, consumer spending has proven resilient to the slowdown in old growth drivers like manufacturing and housing investment. Chinese shoppers will increase their spending by 10 percent per year through the end of the decade as incomes rise, according to consultancy McKinsey & Co.

“It’s not surprising that you’d see us foreigners all buying very similar types of stocks like Kweichow Moutai," said Awdry, declining to comment on his holdings. “When we look at the Chinese economy, the most robust demand at the moment is the consumer, driven by rising income, people moving to the cities and having more discretionary spending -- that is more vibrant at the moment than other parts of the economy."

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