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Kweichow Moutai: World's most valuable liquor stock still has room to grow

[HONG KONG] The world's most valuable liquor stock is set to become even more valuable, with earnings this week expected to confirm China's Kweichow Moutai Co has avoided the slowdown in consumer spending that has hobbled some other producers of luxury goods.

Analysts are predicting Moutai, which makes a top-shelf version of the local grain liquor known as baijiu, will build on its 31 per cent rally in 2019 to gain a further 6 per cent over the next 12 months. Results due Thursday may further fuel that bull run, with the distiller saying in a preliminary estimate in January that 2018 revenue grew 23 per cent, outstripping its own earlier forecast.

The distiller's confident position, even as consumer companies from Walmart Inc to Tupperware Brands Corp and Apple Inc feel the blow of China's slowest economic expansion in almost three decades, is making it an investor darling. It will also benefit from MSCI Inc's decision in February to expand the weighting of China-listed stocks in benchmark indices, allowing return-hungry foreign investors more access to these companies.

With its stock price 6.4 per cent lower than analysts' average 12 month price target as of Tuesday, Moutai has the highest return potential of top global liquor companies, according to data compiled by Bloomberg. Diageo has a negative return potential of 1.2 per cent while Pernod Ricard SA's is negative 4.3 per cent. Moutai's local rival, Wuliangye Yibin Co, has a negative return potential of 3.9 per cent.

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Moutai shares climbed as much as 1.5 per cent to 784.32 yuan in early Shanghai trading on Wednesday.

While many luxury brands say that Chinese demand remains healthy, investors are anxiously watching for any shifts in high-end consumer buying. Prada SpA, for example, lost US$864 million in market value last week after slower Chinese spending led to a drop in annual profit.

Amid this uncertainty, baijiu makers have been a safe bet after a rocky second-half of 2018 when Moutai fell as much as 34 per cent amid concern over the economy.

"Last year, the ultra premium baijiu stocks were materially oversold on the back of demand growth concerns," said Euan McLeish, a Hong Kong-based consumer analyst at Sanford C Bernstein. "These concerns haven't materialised and the stocks have been correcting since the start of the year."

Liquor company valuations haven't become too lofty yet, despite the recent rally. Baijiu stocks - with price-to-earnings ratios ranging between 20 and 25 - are in line with the major international liquor brands, according to Yang Yan, a Hong Kong-based fund manager at Atlantis Investment Management.

Moutai's three-year average operating margin of 73 per cent was No 1 among the world's 500 largest companies and net income for 2018 is expected to more than double from 2016 levels, according to data compiled by Bloomberg.

The risk remains that persistent economic weakness and continuing trade uncertainties may eventually begin to bite, but Moutai is cautious about that. Product prices won't be raised in coming months, Chairman Li Baofang said in November. The company said in December it expected revenue to rise by 14 per cent in 2019.

The longer-term prospects of the sector remain intact. Bernstein's Mr McLeish forecasts the baijiu makers will stay strong as long as China's burgeoning middle-class population continues to covet this prized drink as a status symbol.

"At the end of the day, a few bottles of ultra premium baijiu over the Spring Festival dinner table aren't going to break the bank," said Mr McLeish. "But their absence might be embarrassing for the host."