April 21, 2017 3:58 pm JST

Growth separating wheat from chaff in China consumer stocks

Rising incomes lift high-end names and frustrate cheaper rivals

NORIKO OKEMOTO, NQN staff writer

Retailers in China are lately running short of the baijiu liquor. © Reuters

HONG KONG-- There is a growing split in China's consumer stocks as people in the country grow richer.

The winners are those selling high-end goods such as premium baijiu liquor and home appliances. Losers include low-end food processors, whose sales have stagnated.

Shares of Kweichow Moutai, a Shanghai-listed baijiu maker, have been hitting all-time highs recently. On April 15, the company said its net profit grew 8% in 2016 to 16.7 billion yuan ($2.42 billion). Although the growth was modest, investors took notice of the fact that retailers are running short of the liquor.

Rumors suggested the company has not booked all its profit. The company has denied that, but speculation lingers on. Rival baijiu maker Wuliangye Yibin's shares have also been at year-to-date highs.

On April 20, Gree Electric Appliances, China's largest air conditioner maker, hit a new year-to-date high on the Shenzhen Stock Exchange. Investors bought the shares on reports that air conditioner sales rose by more than 30% on the year in March. The stock is up more than 30% since so far this year.

As Chinese grow more health-conscious, sales of pharmaceuticals, including traditional Chinese medicines, are also on the rise. Shares of Beijing TongRenTang, which deals in high-grade Chinese medicine, have been buoyant.

"China's consumption patterns have changed," said Shum Chun-ying, CEO of Sincere Securities. According to data released on April 17 by the China Alcoholic Drinks Association, a trade group, baijiu sales from larger distillers rose 10%, year on year, in 2016 to 617.5 billion yuan ($89.7 billion).

Premium baijiu used to be a popular gift for senior bureaucrats. These days it is also drunk by ordinary folk. Some migrant workers from inland China purchase baiju after returning home to recreate their urban lifestyles. In cities, young people sip baijiu cocktails.

Cheap, not cheerful

By contrast, companies specializing in selling cheaper food and drinks are faring poorly, along with their shares. Tsingtao Brewery, a major beer maker, said in late March that its net profit fell 39% in 2016 to 1.04 billion yuan. According to the China Alcoholic Drinks Association, the country's beer sales fell 1.3% last year to 183.2 billion yuan. As demand for beer has shrunk, Tsingtao's shares have gone soft. Shares in Sanquan Food, a maker of frozen dumplings and other instant foods, hit a year-to-date low on April 19.

If the changes in China's consumption patterns continue, the contrast between winners and losers among consumer stocks may grow sharper still.

Asia300

Kweichow Moutai Co., Ltd.

China

Market(Ticker): SHG(600519)
Sector:
Industry:
Consumer Non-Durables
Beverages: Alcoholic
Market cap(USD): 76,417.17M
Shares: 1,256.19M
Asia300

Gree Electric Appliances, Inc. of Zhuhai

China

Market(Ticker): SHE(000651)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 29,563.21M
Shares: 6,015.73M
Asia300

Tsingtao Brewery Co., Ltd.

China

Market(Ticker): HKG(168)
Sector:
Industry:
Consumer Non-Durables
Beverages: Alcoholic
Market cap(USD): 6,335.87M
Shares: 1,350.98M

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