(Oct 22): Kweichow Moutai Co’s shares have more than doubled since late last year as the maker of baijiu liquor repeatedly hit fresh records. But by one measure, the rally may be under threat.
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A 123% advance since October 2018 has increased the Chinese firm’s market capitalisation to about US$208 billion ($283 billion), making it the world’s most valuable distiller and one of the country’s biggest listed companies. Moutai has climbed to an all-time high 28 times this year as investors piled into a stock that’s widely considered a safe harbour.
It’s also made the shares more expensive, with the company trading at close to 30 times estimated earnings for the next 12 months. That level has been its valuation ceiling for a decade, preceding double-digit percentage losses when the multiple trades around that line.
Adding to the uncertainty are the firm’s third-quarter results, which showed revenue growth slowed from earlier this year. All but two of 42 analysts covering the stock recommend buying it, but their average price target implies a gain of slightly more than 8% in the next 12 months.
“The share price rally is not sustainable,” said Allen Cheng of Morningstar Inc., the only analyst with a sell rating. “The company has good fundamentals, but they’re well reflected in the current share price and it’s hard to imagine that the pace of the rally will last.”
Moutai’s Flying Fairy liquor, which has a 53% alcohol content and goes for about 1,500 yuan ($289) a bottle and up, is China’s national drink and a staple for gift-giving. As a stock, Moutai is viewed as shielded from economic and geopolitical risks. It’s jumped close to sevenfold since mid-2015, pushing the firm’s capitalisation above companies such as PepsiCo Inc and Boeing Co.
But valuations have reached a high water mark that’s been tested three times in the past decade, with the stock falling each time.
When price to estimated forward earnings hit 29.5 in August 2009, the stock dropped 12% in a week. When it passed the 30 threshold in November 2010, the shares sank 20% in the next six weeks. Seven years later, Moutai plunged 14% in less than two weeks after getting close to touching the 30 level.
In the long term, the stock rebounded from the losses, and analysts say the same will happen this time. Moutai is down 3.5% since it last reached a record high on Oct 15.
The company’s valuation may cause short-term pressure on the share price but in the long run its high profitability will have more impact, according to Mark Huang, a Hong Kong-based analyst at Bright Smart Securities.
Further gains would be good news for investors in the Global X MSCI China Consumer Staples exchange-traded fund, which is almost 10% invested in Moutai and has gained 40% this year. The fund is among the top 10 performers of the 1,911 US non-leverage ETFs in 2019.
