Chinese Liquor

Chinese Liquor : a consumer sector that bucked the trend during the pandemic

Chinese Liquor : According to Chinese National Business Daily, as of December 31 2020, the liquor industry ranked first in the Chinese stock market with a 120% increase. During the pandemic, when most manufacturing and physical companies were hit, liquor stocks grew against the trend. 

In fact, liquor stocks have always been a favorite in the Chinese market. Since 2016, the liquor industry has grown by 605.76%, ranking first among 227 Shenwan third-level industries, surpassing popular industries such as semiconductors (265.89%) and medical services (124.79%)(Wind). 

There are three reasons for the stellar performance of liquor stocks. First, with the help of television advertisements and social media, China’s liquor culture has brought about the trend of liquor collection. Second, the Chinese people’s desire to invest is becoming stronger, and financial institutions are optimistic about the liquor industry. Third, the top liquor companies are monopolistic.

RankIndustryIncrease
1.Liquor605.76%
2.Semiconductors265.89%
9.Medical Services124.79%
*Data comes from Wind wind.com.cn

Interestingly enough, there are only 578 million people who actually drink Chinese liquor, but the number of people who purchase liquor far exceeds that. Everyone believes that since blended liquor is not volatile, the longer it is stored, the more fragrant it becomes. Consequently the Chinese liquor has formed a collection market, meaning that Chinese liquor has become “collectible” in the eyes of the people through concept guidance from advertisements similar to the Rolex and diamond model.

Specifically, liquor from top liquor companies are particularly seen as “collectibles” with luxury attributes.  To counter inflation, people believe that collecting “Moutai”–an elite brand of Chinese white wine– is better than saving in the bank. Despite that very few bottles will be consumed, the purchase rate remains high. 

Since the current profit growth of liquor-head enterprises is stable,  Chinese liquor companies fully meet the needs of financial institutions, so these institutions do not care whether the liquor market  will be the next “Dutch Tulip Bubble.” Still, in the eyes of the people, liquor is worth collecting.

Fund institutions group together, and the stock price ultimately depends on the number of buyers. Contemporary China is becoming a capital-dominant and a capital-exporting country due to the accumulation of social wealth. As the Gini coefficient increases, more capital is taken away by the powerful class in the process of social wealth redistribution, and the the working class receives a smaller piece of cake.

As a result,  the total social demand led by the majority of the society is also shrinking, which leads to a slower increase in work returns (salary growth). 

In addition, after deducting the currency depreciation and asset appreciation caused by the unanchored currency release, the income growth rate of the working-class has little left. People will want more cake, so they will use leverage to buy assets (real estate, funds) with a large amount of capital.

Many fund managers buy stocks of wine companies. A major feature of the Chinese stock market is “The price of a few outstanding stocks will be shared by all stocks in the same industry”. As more and more people buy liquor stocks, the price of liquor stocks is getting higher and higher; and the higher the price, the more reluctant the holders to sell. This cycle changes the relationship between supply and demand, and positive feedback comes round after round.

In addition, the more people believe in the myth of liquor collection, the higher the revenue of liquor. As long as everyone helps to clean up the inventory of liquor companies, the financial reports of liquor companies will look good, with high stock prices. Relative to its revenue, it appears that the P/E ratio is not high, which is also a round of positive feedback.

201720182019
Revenue611772889
Revenue Growth52.07%26.43%15.10%
Net Profit27135241.2
Net Profit Growth61.97%30.00%17.05%
Net Profit Rate44.35%45.60%46.34%
ROE29.61%31.20%30.30%
*Data comes from Wind wind.com.cn

The Chinese liquor market has a clear structure, and the risk of investment uncertainty is low. There are three high-end liquors in the Chinese market: “Feitian Moutai”, “52% Wuliangye” and “Guojiao 1573”. They account for more than 90% of the high-end liquor market. The leading liquor manufacturer Moutai has a guide price of 1499 yuan ($232), but the market price is as high as 3000 yuan ($464).

Despite its high price, Moutai remains more popular than any other brand, even though the second-ranked Wuliangye sells for only 1399 yuan. This is thanks to the traditional concepts of gift giving & hospitality which have been deeply rooted in the Chinese culture. Chinese people buy liquor as banquet drinks or visit gifts during the Spring New Year and other holidays.

Naturally, as the most respected liquor, Moutai is most sought after. This then gives Moutai a monopolistic market position and a clear structure to the liquor market: while Moutai–the leading company–sits firmly at the top,  secondary companies find their own places in the market, instead of blindly competing with Moutai.

Despite the high prices of top liquors, the entire  liquor market has representative products at all price stages, and this contributes to market stability. As a result, the  market has attracted loads of investment and finally achieved a staggering result of 750% growth in 10 years.

RankCompanyProductMarket Share
1.Guizhou MoutaiFeitian Moutai63%
2.Wuliangye52% Wuliangye26%
3.Luzhou LaojiaoGuojiao 15736%
4.Others5%

*Data comes from Dongguan Securities

In general, Chinese liquor has become a rising star in the stock market due to its stable market, its investment and collection value, and the preference of financial institutions and media.

Written by Haoyuan Ma

Edited by Hantong Wu, Christine Lee & Adele Su Yan Teo

Chinese Liquor

Leading Artificial Intelligence and Financial Advisor – Rebellion Research

Baijiu – Wikipedia