Gan bei to top baijiu stocks even as outlook dims for traditional Chinese alcoholic drinks

Chinese people may be shifting away from traditional alcoholic drinks like baijiu, an industry already hit hard by Beijing’s crackdown on corruption, but top distillers like Kweichow Moutai still offer a good investment opportunity, says a new Macquarie research report.

Macquarie rates the nation’s top distillers, including the Shanghai-listed Kweichow Moutai, and Shenzhen-listed Yanghe Brewery as “outperform”, tagging the first as its top pick among China’s alcoholic beverage companies.

“We consider Moutai a good defensive play in a weak market, given its continuing recovery in earnings growth, strong balance sheet, and cheap valuation,” Macquarie analysts led by Chen Zibo said in the report.

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“We see potential ex-factory price hikes a share price catalyst. 10 per cent hike in average selling price would lead to 15 per cent increase in earnings, according to our sensitivity analysis.”

The growth of China’s alcoholic beverage industry has slumped since 2012, with Beijing stepping up its crackdown on corruption and extravagance. But the baijiu market still grew 12 per cent a year by value and 7 per cent by volume during 2012-2014, making it the most resilient performer among all major categories in the alcohol industry, far outperforming the nation’s beer market.

Baijiu sales have been recovering since the second half of 2014. Sales in October 2015 reached 49.43 billion yuan (HK$58.55 billion), a 15 per cent increase year on year.

“We expect Moutai’s net profit to gradually recover to 11 per cent and 10 per cent growth in its financial year of 2017 and 2018 respectively, compared to 5 per cent in 2015, mainly driven by volume growth in the high-end market on the back of product mix upgrades and its outstanding brand equity,” the report said.