Prices for a prestigious Chinese alcohol brand are falling, raising concerns about economic growth. Wholesale prices for Shanghai-listed Kweichow Moutai’s 53% ABV Flying Fairy liquor fell more than 5% in a week. Those prices are now down more than 30% from their peak in September 2021, Nomura analysts said in a research report, noting that during the house price boom from 2015 to 2021, Flying Fairy wholesale prices rose nearly 360%. Also known as “Feitian Mutai”, a brand of traditional Chinese baijiu liquor made from red sorghum, is a status symbol used for government gifts as well as high-level business deals and weddings. This also takes into account the collectible value of old bottles. What’s less clear is whether the decline in China’s apparent wealth signifies a significant blow to the company itself. Broad gains Morningstar senior equity analyst Jennifer Song said Kweichow Moutai has maintained strong profit margins and that it has “plenty of room” to raise selling prices. Song said recent conversations with institutional clients have revealed no change in their views on Mutai. Despite falling 13% this year, Kweichou Moutai remains the largest stock by market capitalization in Shanghai, making it a significant part of exchange-traded funds tracking mainland Chinese stocks. In contrast, shares of PetroChina, Shanghai’s second-largest company by market value, have risen more than 40% since the start of the year. Stock market leaders change every few years, and mining companies such as copper, coal and crude oil have performed well recently, said Ye Yuhua, manager of Liangdian Private Capital in Guangzhou. He agreed that falling wholesale prices would not have much of an impact on Moutai’s immediate earnings. But he said it would affect investor sentiment about the future: whether Moutai will have to cut supplies to the market if there is excess inventory in the next six to 12 months and whether it will start selling. Anecdotes about the economy have not helped raise expectations for demand for high-end baijiu. Nomura analysts noted that industry data showed existing home prices fell 26.5% in 50 major Chinese cities from a peak in July 2021 to May 2024. Local customs data showed that the first five months of 2024 compared with last year. What’s also different about Moutai’s share decline is that investors aren’t rushing to fish as they have in the past, Ye said. Ye owns some shares in Moutai and believes the price cut creates some opportunities. He certainly doesn’t expect Mutai’s social status to change. Mutai named a new chairman at the end of April after his predecessor took up the local government position. At a shareholder meeting last month, “the new chairman… emphasized respect for distributors’ profit models while encouraging them to improve the company’s reputation by pursuing mutual growth,” Huatai Financial Holdings said in a June 11 report. “We are optimistic about the company’s potential, supported by its strong brand and strong operations,” Huatai said, reiterating his buy recommendation. The target price for the stock is RMB 2,214.30 ($304.97). After Moutai’s first quarterly report in late April, Goldman Sachs, JPMorgan and Macquarie set price targets for the stock of at least 2,000 yuan, according to FactSet. That’s more than 35% higher than the stock’s closing price on Friday. “We believe the recent decline in wholesale prices is mainly due to arbitrageurs in the market,” said Morningstar’s Song. She expects wholesale prices to rise in the coming months given major Chinese holidays in the fall. Second-quarter weakness The second quarter is typically the weakest of the year for baijiu demand, while promotional events around June 18 and Moutai’s own efforts to attract young people have lowered the final retail price, Song said. Song also noted that demand for weddings is falling as many people who adhere to traditional Chinese customs do not consider this a good year for marriage. According to Wind Information, official Chinese data last week showed that marriage registrations fell 8.3% in the first quarter from a year earlier to 1.97 million couples, the lowest since 2020 when the coronavirus outbreak hit. pandemic. Song said she had not changed her earnings forecasts for the “slightly undervalued” stock: share prices would need to fall to 1,262 yuan for Moutai to be “significantly undervalued.” The shares closed at 1,471 yuan on Friday.
