Fiery Booze Drinkers Drive China’s Biggest Gains in Stocks

(Bloomberg) -- Drink a baijiu toast to the new year. China’s consumer staples stocks, led by makers of the fiery Chinese liquor, are helping drive stock gains this year as sales prospects get rosier.

As China’s markets endured a year of turmoil amid concerns over the economic outlook, consumer staples was the only sector on the country’s key stocks exchanges with positive returns last year. Those businesses, which sell things for daily use, surged with average revenue in fiscal 2017 forecast to grow three times as quickly as their global peers.

“The baijiu sector will continue to outperform the industry fundamentally as it still has growing demand,” Mark Chen, a Shanghai-based analyst at UOB Kay Hian Ltd., said by phone. For China’s food industry as a whole, the long-term catalyst is coming from companies upgrading their product mix to satisfy Chinese customers, he said.

Here are four charts that highlight the trends in Chinese consumer staples stocks:

In 2016, investors in consumer staples companies on the CSI 300 Index would have recorded total returns of 11 percent in yuan terms, compared with losses for all the other sector groups. They also outdid their global peers on the MSCI World Consumer Staples Index, which slipped 0.4 percent.

“What we’ve seen in Chinese large-cap staples over the past two years is that they’ve de-stocked inventory and tweaked strategies to suit the changing consumer market, such as by going more premium,” said Hong-Kong based Mizuho Securities Asia Ltd. analyst Jeremy Yeo. “That’s returned them to top line growth and made them attractive to investors again.”

Baijiu-makers such as Kweichow Moutai Co., Wuliangye Yibin Co. and Luzhou Laojiao Co. dominated the gains, while China’s largest dairy producer Inner Mongolia Yili Industrial Group Co., and Henan Shuanghui Investment & Development Co., which sells meat products, also rose.

Moutai shares closed up 1.2 percent at 350.76 yuan in Shanghai, after rising as much as 3.8 percent to an intraday record Friday. Wuliangye gained 0.5 percent and Luzhou Laojiao advanced 0.2 percent. The CSI 300 Index fell 0.6 percent.

Makers of baijiu, the grain liquor known as the toast of choice for Chinese leaders, have bounced back from President Xi Jinping’s campaigns against corruption and extravagance. Demand is now being buoyed by rising middle-class incomes, said Yuanta Securities Co. analyst Juliette Liu.

Shares of baijiu-makers can provide investors with stability amid volatile markets, Liu said. “The baijiu industry is mature, which lessens the likelihood of bubbles and volatility, and that’s what investors want now,” she said.

High-end baijiu is “extremely profitable,” and the top four producers in China, including Moutai and Wuliangye, are estimated to account for 27 percent of earnings before interest and taxes in the global spirits industry, according to the Bernstein Global Spirits Guide published this month.

Analysts expect revenue for the distillers to surge in 2016, after two years of weak sales, and for strong growth to be sustained in 2017. But they could be outshone by the food producers, which are being boosted by low corn prices.

Food producers are benefiting from slumping corn prices as China’s government ended some price supports. Revenue at poultry producer Fujian Sunner Development Co. is forecast to surge 32 percent in fiscal 2017, twice as fast as Moutai, while sweetener maker Cofco Tunhe Co.’s sales are expected to rise 23 percent.

“Low corn prices is good for all agricultural businesses that buy corn as raw material, like sweetener and animal feed producers. The lower prices also feed through to the costs of pigs and chicken farmers, pushing up margins for all,” said Ma Wenfeng, an analyst at Beijing Orient Agribusiness Consultants Ltd.

The prospects for the food industry may also be feeding through to deals. China Mengniu Dairy Co. on Thursday offered HK$6.92 billion ($892 million) to buy out China Modern Dairy Holdings Ltd. and gain control over the country’s biggest raw milk supplier. That could surpass Yili’s purchase of a stake in China Shengmu Organic Milk Ltd. to become the world’s second-biggest dairy deal in the past year, according to data compiled by Bloomberg.

Despite the surge in share prices, investors in the sector received on average a 9 percent discount, on a price to earnings basis in 2016, compared with their global peers.

The 17 Chinese firms that make up the consumer staples industry on the CSI 300 Index have an average revenue growth forecast of 16 percent for fiscal 2017, after expected growth of 5 percent in 2016, according to data compiled by Bloomberg. That’s about three times as fast as the average gain forecast for consumer staples companies in the MSCI World Index.

Those prospects may be driving interest in consumer-focused public offerings. The China Securities Regulatory Commission in the past month approved IPO applications of companies including frozen seafood producer Fu Jian Anjoy Foods Co. and Hunan Yanjin Puzi Foodstuff Co., which makes prepared foods.

--With assistance from Daniela Wei To contact Bloomberg News staff for this story: Rachel Chang in Shanghai at wchang98@bloomberg.net. To contact the editors responsible for this story: K. Oanh Ha at oha3@bloomberg.net, Daryl Loo, Garfield Reynolds

With assistance from Rachel Chang