Prices for a prestigious Chinese alcohol brand are falling, raising concerns about economic growth. “Flying Fairy”, a 53% alcoholic drink from Shanghai-listed Kweichow Moutai, saw wholesale prices fall more than 5% within a week. These prices have now fallen by more than 30% since their peak in September 2021, analysts at Nomura Bank said in a research report, noting that during the housing price boom from 2015 to 2021, Flying Fairy wholesale prices rose by about 360%. Also known as “Feitian Moutai,” it is a brand of the traditional Chinese drink baijiu, made from red sorghum, and is a status symbol used in government gifts and featured at high-profile business deals and weddings. This also gives value to collectors of vintage bottles. It is unclear whether the decline in the apparent proxy for Chinese wealth means the company itself will be significantly harmed. Wide Margins Jennifer Song, senior equity analyst at Morningstar, noted that Kweichow Moutai has maintained wide profit margins and has “a lot of room” to raise its prices at the factory. Song said recent conversations with institutional clients did not reveal any change in their view of Moutai. Despite falling 13% so far this year, Koizhou Moutai remains the largest stock by market cap in the Shanghai Composite Index, making it a large part of exchange-traded funds that track mainland Chinese stocks. By contrast, shares of PetroChina, the second-largest company in Shanghai Composite by market capitalization, have risen more than 40% year-to-date. Stock market leaders change every few years, and companies on the production side such as copper, coal and crude oil companies have performed well recently, said Yi Yuhua, director of Guangzhou-based Liangdian Private Capital. He agreed that lower wholesale prices would not have a significant impact on Moutai's direct profits. But he said there is an impact on investor sentiment about the future – whether Moutai will have to reduce its supply to the market if it builds up a glut of inventory and starts selling in the next six to 12 months. Tidbits about the economy did not help bolster expectations about demand for high-end baijiu products. Nomura analysts noted that industry data showed existing home prices fell 26.5% in 50 major Chinese cities from their peak in July 2021 to May 2024. Duty-free sales on the tropical Chinese island of Hainan fell in May, down nearly 30% in a year. 2020. Local customs data showed that the first five months of 2024 compared to last year. What's also different about Moutai's stock decline is that investors are not rushing to hunt the bottom as they did in the past, Ye said. Yi holds some Moutai shares and believes the price decline creates some opportunities. He certainly did not expect Moutai's social status to change. Mutai was appointed as the new chief in late April after his predecessor took up a position in the local government. At a shareholders' meeting last month, the new chairman “stressed respect for distributors' profit models, while in return encouraging them to enhance the company's reputation and achieve mutual growth,” Huatai Financial Holdings said in a June 11 report. “We are optimistic about the company's potential, supported by its strong brand strength and efficient operations,” Huatai said, reiterating his buy rating. The target price is 2,214.30 yuan ($304.97) per share. Following Moutai's first-quarter report in late April, Goldman Sachs, JPMorgan and Macquarie had price targets of at least 2,000 yuan per share, according to FactSet. That's 35% higher than where shares closed on Friday. “We believe the recent decline in wholesale prices is mostly caused by market arbitrageurs,” Morningstar's Song said. It expects wholesale prices to rise in the coming months due to major Chinese holidays in the fall. Weak second quarter Song said the second quarter is usually the weakest of the year for demand for baguio, while promotional activities around June 18 and Moutai's own efforts to reach young people lowered the final retail price. Song also noted that the demand for weddings has decreased because many people who adhere to traditional Chinese customs do not believe this is a good year to get married. Official Chinese data last week showed that marriage registrations fell 8.3% in the first quarter from a year ago, to 1.97 million couples, the lowest level since 2020 when the pandemic struck, according to Wind Information. Song said it has not changed its earnings forecast for what it considers the shares to be “slightly undervalued” – as share prices would have to fall to 1,262 yuan for Moutai to be “significantly undervalued”. Shares closed at 1,471 yuan on Friday.
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China's growth concerns have hit Moutai. Some see an opportunity
