Chinese baijiu liquor stocks tumble amid regulatory concerns

Signage for the Baijiu Liqueur from China K Weichow Moutai Distillery Co.

Nelson Ching | Bloomberg | Getty Images

BEIJING – K Weichow Moutai and other Chinese liquor stocks fell on course for five-day losses on Thursday amid announced new regulation in the industry.

The reports come as the Chinese central government released a series of new announcements in the past few months, some of which have taken investors by surprise. For example, authorities ordered app stores to remove the Chinese ridesharing app Didi just days after its massive US public offering. Shares have since fallen 41%.

Beijing’s frenzy of action – including combating monopoly practices by technology companies, increasing data security and preventing “disorderly capital expansion” – is an issue of “shared prosperity”. The vague term has emerged in political speeches as a slogan for supporting moderate prosperity for everyone, not just a few.

In the traditional Chinese “Baijiu” liquor industry, the high-end Koftow Moutai brand is the most expensive stock traded in the mainland A-share market. Moutai is preferred by many Chinese for doing business at business lunches where social drinking is deeply ingrained.

On Thursday, the state-run Securities Times reported, citing trade publications, that market leader Moutai is trying to stabilize prices for its products before the big holidays over the next two months, and the price of a bottle has fallen by as much as 300 yuan ($ 46, 40) on the last day.

Chinese media reported Thursday afternoon that K Weichow Moutai said it had not changed pricing guidelines.

Moutai bottle prices have soared along with the company’s share price, to the equivalent of a few hundred dollars. In June, a box of Moutai from 1974 sold for £ 1 million ($ 1.37 million) at a Sotheby’s auction.

Moutai shares fell more than 4% on Thursday, bringing the 5-day losses to more than 1.5%. Baijiu stocks were up earlier this week ahead of Thursday’s losses.

Other big baiijiu makers like Wuliangye and Luzhou Laojiao each fell more than 4% and were on track for bigger losses over the past five trading days.

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On Friday, the Securities Times reported that the national market regulator had met with members of the baijiu industry, which rocked stocks.

According to Damon Zhang, assistant portfolio manager for global investments at China Asset Management Co.

The Market Authority did not immediately respond to a CNBC request for comment.

Zhang said in a phone interview on Wednesday that he expects the demand for baiijiu to remain “healthy” and that regulation should support long-term growth. Although crackdown on corruption in 2012 and 2013 reduced some demand for baiijiu, he said that those who do business and ordinary people still enjoy the liquor on holidays such as the New Year celebrations.

UBS analysts maintained their buy ratings for Moutai, Jiangsu Yanghe Brewery, Luzhou Laojiao and Wuliangye Yibin in a release dated August 23.

“We believe that vendors ‘aggressive stockpiling, fueled by expectations of baiijiu manufacturers’ price increases, has resulted in unhealthy channel inventory (over 3 months according to our dealer survey),” the analysts said. “We believe that the regulation will aim to stop price speculation and thus prevent further inventory behavior by dealers.”

K Weichow Moutai and Wuliangye are among the top five most invested stocks in mainland China by the number of overseas institutional investors, including those in Hong Kong, according to Wind Information.

These institutes have reduced their investments in the last few weeks. Wind said only 96 held Moutai shares on Wednesday, compared with 101 at the end of July. The data showed that during that time, foreign financial institutions holding Wuliangye fell from 98 to 91.

“Concerns about regulatory risk could linger until there is clearer government policy that could put stock prices under pressure in the short term. However, we believe that regulation will lead to healthy and sustainable long-term growth for the industry and good quality companies should benefit from it. ”Jefferies analysts said in a statement dated Aug. 22, maintaining their“ buy ”rating on Moutai , Wuliangye and Fen Wine.

In recent days, senior government officials and academics have been addressing concerns that the focus of the pursuit of “shared prosperity” was on helping people on lower incomes, rather than robbing the rich to help the poor.

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