May 15, 2020 / 8:02 AM / 17 days ago

Shares of liquor giant Kweichow Moutai surge on China recovery bets

SHANGHAI (Reuters) - Kweichow Moutai, the iconic Chinese liquor giant, defied a global slump in alcohol demand by repeatedly hitting closing highs this week, as investors bet on a robust consumption recovery in China amid the pandemic.

Moutai’s share price surge underlines the low correlation between Chinese and global equities amid the economically damaging coronavirus crisis. It also eases worries about financial health of Guizhou, the local government owner of the world’s most valuable liquor maker.

Moutai shares (600519.SS) hit record closing highs in six of the past eight trading sessions, buoying the company’s capitalisation briefly past Guizhou’s 2019 GDP of 1.677 trillion yuan ($236.18 billion) this week. The stock, China’s priciest, trades at around 1,300 yuan per share.

“The share price is a reflection of the company’s good fundamentals,” said Liam Zhou, founder of Minority Asset Management, who holds Moutai shares.

Zhou, who uses behavioural finance to predict stock prices, expects Moutai shares to rise further.

Goldman Sachs analysts also thought the alcohol-maker was in a good position.

“Despite the challenging environment during Covid19 outbreak, we think the company could still maintain robust growth momentum thanks to its strong bargaining power,” Goldman Sachs wrote.

Moutai posted a 17% jump in net profit during the first quarter despite the epidemic.

In contrast, French spirits maker Pernod Ricard (PERP.PA) posted a 14.5% fall in sales during the quarter while Anheuser-Busch InBev (ABI.BR) suffered a 14% drop in core profit. London-based Diageo Plc (DGE.L) has abandoned its annual forecast for sales and profit growth.

“Throughout the coronavirus outbreak, China A-shares have shown low correlations to global and regional equities,” MSCI wrote this week.

Partly aided by the surge in Moutai, China's No.2 stock by market value, CSI300 is down just 4.2% so far this year, compared with a 17% slump in the Dow Jones Industrial Average .DJI.

Moutai’s stellar performance has also helped Guizhou, one of China’s poorest provinces, even as rating agency S&P issued negative credit outlook on local government financing vehicles (LGFVs), citing weakening fiscal positions and record LGFV-fuelled borrowing to fund economic stimulus.

Investors who hold bonds issued by LGFVs in Guizhou, the biggest shareholder in Moutai, say they are confident.

“Many investors are not worried too much about Guizhou bonds, though they see risks in LGFV bonds in places like northeastern China,” said Xiaofang Liu, head of research at Shanghai Fengshi Asset Management.

The provincial government of Guizhou directly and indirectly holds a combined 62% stake in Moutai, worth over 1 trillion yuan by market value. That compares with 884.98 billion yuan in the Guizhou government’s outstanding debt at the end of 2018, according to Pacific Securities.

Theoretically, the market capitalisation of Moutai alone could defuse the province’s credit risk, according to the brokerage.

($1 = 7.1006 Chinese yuan)

Reporting by Samuel Shen, Luoyan Liu and Brenda Goh. Editing by Gerry Doyle

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