Liquor shares fizzle despite festival sales surge

China Daily, February 9, 2011

Liquor producers in China have enjoyed brisk sales while the country celebrates the Spring Festival but their stocks have disappointed investors who bet on the holiday spending spree.

Shares of white spirits and wine producers have declined by an average of 5.72 percent over the past three months despite the booming holiday season sales, according to Wind Info. Franchised stores of Kweichow Moutai Co, China's largest liquor maker by market value, can hardly keep up with the demand, which triggered a new round of price surges in the liquor market. Kweichow Moutai raised its factory price by about 20 percent on January 1. The liquor producer also lifted the retail price cap for normal Moutai from 869 yuan ($132) to 959 yuan.

Unlike the surging liquor prices, share prices of liquor producers have experienced a round of corrections, which reflected that investor expectations of a holiday sales boom has already been factored into stock prices, analysts said.

However, liquor stocks, supported by solid fundamentals, remain a good investment option in the long run and the recent correction has made their valuations reach levels where buying opportunities may emerge, analysts said.

The current price-to-earning ratio of high-end liquor producers is around 20, which is close to the record low hit during the financial crisis in 2008. In the meantime, the performance of the liquor makers will continue to be strong in 2011, growing at an even faster pace than 2010, Orient Securities said in a report.

"In the long run, liquor producers are going to benefit from the rising trend in living standards and domestic prices," said Liu Yang, an analyst at China Securities. "The mounting expectations of higher inflation will also help boost liquor companies, which are seen as an inflation-proof industry."

China's liquor producers are expanding production to meet the rising demand as the government promotes domestic consumption to reduce a reliance on exports. Consumption of white spirits in China has increased at a compound annual rate of 20 percent in the past five years, according to data from the National Bureau of Statistics.

Kweichow Moutai Co plans to double its annual capacity to 40,000 tons by the end of 2015, while Jiangsu Yanghe Brewery Joint-Stock Co, the third-largest liquor maker by market value, plans to spend more than 1.7 billion yuan to expand its business. Liquor producers are among the companies that will benefit from China's shift from an export-driven to a consumption-driven economy, a top priority of the country's 12th Five-Year Plan (2011-2015).

Consumer companies are expected to have a compound annual growth rate of more than 30 percent for earnings over the next three years, Zhao Xueqin, an analyst at CITIC Securities, wrote in a report.