Chinese food producers have world's richest valuations

[HONG KONG] Chinese food and beverage stocks are getting more expensive than their peers worldwide following a blockbuster 2019 rally.

Pork prices have shot through the roof due to African swine fever decimating the pig population, while the trade war has also driven demand for domestic consumer stocks as investors seek assets relatively immune to tariffs. Excluding unprofitable firms and those with a market value below US$1 billion, six of the 10 food and beverage stocks with the highest price-earnings ratios globally are Chinese as at Friday, data compiled by Bloomberg shows.

The lofty valuations - pig breeder Luoniushan Co, for example, has a trailing price-to-earnings (PE) ratio of about 1,900 times - can fuel bubble concerns as they defy China's slowing economy and stray far from the modestly priced benchmark index. The Shanghai Composite Index has a PE ratio of 14.5 times.

On a PE scale for food and beverage companies, the top spots are all taken by Chinese firms. The average ratio of the five is more than 600 times. The highest among companies globally with a market value above US$1 billion is California-based software developer ServiceNow Inc, which trades at more than 20,000 times earnings.

This clutch of Chinese food and beverage stocks is unlikely to sustain such high valuations, said Shen Zhengyang, a strategist with Northeast Securities Co. "The craziest period for investors to buy pork feeders is about to be behind us," Shen said.

A gauge of 49 Chinese food and beverage stocks has surged 68 per cent this year, hitting a record high last week, while the Shanghai Composite has advanced 21 per cent. Hong Kong's Hang Seng Index is up just 3.3 per cent. China's wholesale pork spot price jumped to a record high last month. Vice-Premier Hu Chunhua urged measures to resume hog breeding and boost pork supply on Sept 2, the official Xinhua news agency reported.

Here's a look at how the most expensive stocks in the sector have done.

Muyuan, which climbed 164 per cent this year in Shenzhen as of Friday, is valued at 561 times its trailing 12-month earnings. Analysts forecast the Henan-based pig breeder to deliver explosive growth in 2019 net income. Hunan New Wellful Co's shares have surged 221 per cent, valuing the farmer and pig trader at 301 times trailing earnings.

Luoniushan, the leader of the pack in valuation terms, has risen just 2.2 per cent in 2019 through last week. Investors are betting the Hainan-based company will benefit from China's plan to develop the southern island province into an international tourism hub. Luoniushan's horse racing project also attracted speculative money.

Muyuan fell 2.9 per cent as at 9.53am local time on Monday. Hunan New Wellful rose 0.5 per cent and Luoniushan was up 1.4 per cent.

BLOOMBERG