Translated by Andrew Vanburen from a Chinese-language piece in Securities Times
FOR ANYONE WHO has attended a wedding or contract signing in China, it is hard to escape from the proceedings without first being asked to consume a few shots of baijiu -- the clear liquor ubiquitous across the PRC.
It has even been called the country’s national drink, and includes brands like Singapore-listed Dukang.
So which ones are potent and which are leaving investors with a bad hangover?
In other words, should investors in baijiu shares be sharing in the sublime gifts of Bacchus in a spirit of fellowship?
Or are they simply trying to drown their sorrows in a poorly chosen investment?
Now is as good a time as any to ask this question because the dozen or so listed firms that deal wholly or primarily in the production of baijiu are having a banner year, with their shares outperforming the benchmark Shanghai Composite Index down to the last liquor maker.
But are all listed baijiu plays created equal?
And which are truly of value as opposed to being simply on the bandwagon and drunk with their own ephemeral success?
What we are starting to see now is the seasoned investors out there beginning to separate the wheat from the chaff, as it were, and vote with their capital as to just who deserves to keep riding the baijiu wave.
For that reason, the upswing for all players in this sector is likely to taper off as investor become more choosy about which plays are quality and which are less so.
The biggest baijiu name of them all -- Kweichow Moutai Co Ltd (SHA: 600519) -- was one of the first to issue its interim results.
The southwest China-based distillery said its first-half sales were much lower-than-expected.
This was a wake-up call for over-exuberant baijiu investors of late, with the disappointing sales record of China’s flagship liquor maker serving to sober them up just a bit.
Sober up they did, as many ran for the exits, causing Kweichow Moutai’s A-shares to plummet nearly 5% in one day.
Following in the wake of Kweichow’s interim announcement, Jiangsu Yanghe Brewery (SZA: 002304) and Jiugui Liquor Co (SZA: 000799) also had similar results.
This surely was a sobering development for fund managers with heavy exposure to baijiu plays, and their decision to throw their lots in elsewhere was a big contributor to recent falls in the sector.
And the fact that these three baijiu counters in particular have recently risen to historic highs in terms of share prices was warning enough for the more cautious investors out there who decided it was time to cash in their chips and take some profits.
The market has recently been dominated by the premier brands who are able to leverage on their market recognition and national presence to charge premium prices for their products.
However, the recent resurgence of the smaller, no-name brands with local market presences should have been a warning to shareholders in the top-shelf brands that their run may be coming to a close.
This has caused the market leaders to begin swallowing their pride and lowering prices in order to stay competitive and keep up with the budget bottles.
Feitian Moutai No.53, who recently sold baijiu bottles for a much as 1,800-2,000 yuan a pop just eight months ago, has since had to cut prices down to an average of 1,500 per bottle amid the growing price war.
In similar fashion, the highly popular Wuliangye Yibin Co (SZA: 000858) has been forced to reduce per-bottle prices of its premium No.52 offering to around 1,008 yuan from 1,185 at the beginning of the year.
Sichuan Swellfun (SHA: 600779) now has its No.52 premium baijiu selling for 746 yuan from 826 in March.
Concerns of over-capacity are also eating away at confidence in the sector and driving down average selling prices while eroding margins.
One China-based baijiu play not listed in China but instead selling shares in Singapore is Dukang Distillers Holdings Ltd (SI: DDHL).
Despite registering a stellar 55% jump in October-December net profit to 94.4 million yuan, its Singapore-listed shares are currently hovering at 0.23 sgd, very near its 52-week low of 0.20.
”Baijiu is a product that is unaffected by economic down-cycles. The Group is confident of growing faster than the baijiu market,” Dukang CEO Zhou Tao told investors at the time of its quarterly announcement.
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