Kweichow Moutai Co. (600519.CN), the distiller of China’s most expensive liquor, saw its shares tumble the 10 percent daily limit on Monday after the company posted weaker-than expected third-quarter results.
Moutai reported a 2.7 percent rise in profit for the three months to September and a 3.8 percent expansion in sales.
Investors were disappointed as they had hoped the firm will deliver over 30 percent earnings growth as it had done in the past. With the actual figures coming in way below expectations, the stock received a pummeling, resulting in the worst single-day performance for the counter since it was listed in 2001.
Moutai, considered a bellwether of China’s consumer stocks, is the premium white liquor brand in the country. The company has limited output every year, and Moutai became increasingly sought-after amid the consumption upgrade trend. As a result, the distiller has been able to raise prices and its gross profit margin has kept rising along with sales volume.
Moutai’s annual sales revenue soared from 30 billion yuan in 2015 to 52.7 billion yuan last year. Meanwhile, its net profit spiked from 15.5 billion yuan to 27 billion yuan in the same period. Both were up more than 70 percent.
The share price gain was even more dramatic, zooming from under 200 yuan to over 800 yuan at a point.
Moutai’s current share price weakness can be attributed to China’s economic slowdown, but the truth is there is a limit to growth, and the counter has simply gone up too much on excessive optimism.
The distiller’s trailing P/E multiple has now fallen back to 20 after the price crash on Monday. That’s quite reasonable considering its brand value, product scarcity and earnings growth.
But stock market typically overshoots, so there could be further downside.
Another blue chip, Tencent, has suffered from similar selloff, as it plunged over 45 percent from HK$475 at the beginning of this year to current level of around HK$260. That has wiped out nearly HK$2 trillion in market cap. And the current price is equivalent to a trailing P/E ratio of just 25.
Historical experiences show that the bear market might be close to an end when market leaders like these have come down sharply. That said, it’s hard to precisely tell the bottom.
This article appeared in the Hong Kong Economic Journal on Oct 30
Translation by Julie Zhu
[Chinese version 中文版]
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