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China Says Brokerage Too Bullish in Campaign Against Top Stock

Updated on
  • Shanghai exchange criticizes Essence Securities, Sina reports
  • Kweichow Moutai has doubled this year on profit expectations

A Chinese campaign about the risks of investing in Kweichow Moutai Co. shares intensified on Monday, with reporting that the Shanghai exchange criticized a brokerage for being too bullish.

Essence Securities Co. failed to conduct “prudent analysis” on Moutai and fully disclose related risks when the brokerage raised its price target on the liquor maker last week, news portal Sina reported late Monday, citing a notice from the bourse. A commentary in the state-run Xinhua News Agency on Thursday said the stock should rise at a slower pace, while the company itself issued a statement saying analysts’ share price targets and valuations in the market are “overly high.”

Moutai has doubled this year, with Goldman Sachs Group Inc. raising its price estimate on the company 11 times, amid expectations the company could boost profit margins by increasing direct sales. The company already has an operating margin of more than 70 percent. Xinhua’s warning triggered a slump of as much as 5.8 percent in Moutai shares on Friday, while some other high-flying stocks also tumbled.

The criticism is yet another example of China’s repeated interference in its financial markets, from intervention to slow a stock crash in 2015 to attempts to steady the currency in the wake of a devaluation. The government is targeting Moutai to reduce risks in the market, according to Hao Hong, chief strategist at Bocom International Holding Co. in Hong Kong.

"Moutai is such a heavyweight," Hong said. "When a heavyweight stock has had such a vertical price increase, the government is worried" about the impact on market stability, he said.

In a note dated Thursday, Essence Securities raised its target on Moutai to 900 yuan based on the assumption that the liquor producer would be able to raise the ex-factory price to 1,299 yuan ($196) per bottle. The stock price target suggested 31 percent upside from Wednesday’s level, and is the most aggressive among analysts tracked by Bloomberg. The exchange and Essence Securities declined to comment immediately on the report.

Read a Gadfly column on why investors should be cautious about Moutai

The Shanghai exchange said Essence Securities failed to provide evidence for the estimated increase in ex-factory price, which compares with the current 819 yuan per bottle, according to the exchange notice cited by Sina.

Moutai slid 0.3 percent at the close, extending its three-day decline to 5.8 percent.

— With assistance by Amanda Wang, Jeanny Yu, Amy Li, and Qi Ding

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