Kweichow Moutai: does sell-off signal China’s beleaguered stock market is about to turn around?

The latest sell-off in Chinese bellwether stock, Kweichow Moutai, is being interpreted by analysts as a harbinger of a market bottom after shares in the liquor giant posted their biggest decline in almost a year.

Over the past decade, major declines in the stock have been followed by gains for the benchmark. The CSI 300 Index rose almost 6 per cent in the 12 months that followed a 19 per cent slump in Kweichow Moutai’s shares in September 2013. The benchmark gained 23 per cent over the ensuing year after the stock lost a quarter of its value in October 2018. In the most recent occurrence, the CSI 300 rallied 15 per cent in the six months that followed Kweichow Moutai’s 23 per cent slump last October.

“Historically speaking, it’s a kind of prerequisite for the market to form a bottom,” said Wang Chen, a partner at Xufunds Investment Management in Shanghai. “Sell-offs first start with companies with mediocre fundamentals and then unfold to extend to the most popular trades. When that happens, that means selling pressure is fading and is nearing an end, and the market bottoms out.”

Kweichow Moutai, which produces China’s most famous baijiu liquor under the same brand-name, is an investor favourite due to its solid earnings growth history and track record of regular dividend payouts. It is the second-most valuable stock in China’s onshore markets, with a capitalisation of 2.07 trillion yuan (US$282 billion).

Shares of the distiller tumbled 5.7 per cent on Thursday in Shanghai for its steepest decline in nearly a year, sending analysts scrambling to explain what went wrong. Before that, the stock had been largely flat in the year-to-date, outperforming the benchmark CSI 300 Index’s 6.7 per cent slide.

While some said investors were bringing the company’s valuations in line with the broader market, others said it was a proxy for the China growth story.

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“Foreign funds have been selling it,” said Hong Hao, chief economist at Grow Investment Group. “Moutai is an important stock, but it’s more of a sign of what foreign investors think of China.”

HSBC analysts said in a note that the company’s revenue growth target of around 15 per cent for 2023 could be accomplished, and its price target of 2,202 yuan for the company’s stock was a third higher than the current levels.

“The company has been increasing the ratio of direct sales of Moutai products and expanding its distribution sales ratio of Xiliejiu products,” the analysts wrote in a report in August. “If Moutai maintains stronger market control over its core products, overall margins could continue to rise. We expect Moutai, as a leading baijiu company, to gain more market share, and we are bullish on its robust fundamentals and long-term growth visibility.”

Shares of Kweichow Moutai were up 0.9 per cent at 1,645 yuan on Friday in a weak market. The CSI 300 Index dropped 0.7 per cent to a fresh one-year low, while the Shanghai Composite Index fell by the same margin, closing below the 3,000-point gateway for the first time in 11 months.

Kweichow Moutai is the top pick among China’s baijiu industry, according to Citigroup, which said its launch of crossover product Sauce-scent Latte showcased its determination to innovate and would build up its branding among younger consumers.

“Despite the insignificant earnings contribution, those innovative crossover products have amplified Moutai’s recently elevated efforts on innovation and communication with young demographics, which well differentiates the company from most baijiu peers,” the US bank said in a report last month.

“Sentiment is weak because there is no turnaround in liquidity and the flight of foreign capital offsets other tailwinds,” said Song Yiwei, an analyst at Baohai Securities in Tianjin. “As the stock index keeps refreshing lows, investors shouldn’t be too pessimistic, and patiently wait for the market to stabilise.”