Growth Dragons Weekly: Moutai Down 12% – Is it Time to Buy?
What happened in China this week:
Consumer Stocks Took a Beating, Led by Moutai Down 12%: Is it Time to Buy?
Wegovy Approved in China: China Weight-loss Drug Stocks Rally
M&A Heats Up: Fosun Buys Henlius While China Merchants Acquires HKT & Trust
Upcoming IPOs: Hozon, Ontime, and ESR China REIT
China’s Record-Breaking Investment in Transportation Presents Opportunities
#1 Consumer Stocks Took a Beating, Led by Moutai Down 12%: Is it Time to Buy?
Chinese consumer discretionary stocks have been walloped over the past month. Moutai, the iconic baijiu brand and a bellwether of consumer consumption in China, saw its typical resilience crumble as its share price slid 12%. When the leader is weak, the rest of the baijiu stocks followed suit, with Wuliangye and Luzhou Laojiao down 14% and 20% respectively.
This decline was due to a fall in Moutai’s wholesale prices. The average wholesale price of Flying Fairy, a flagship product of Moutai, dropped below 2,400 yuan per bottle, marking an 8% decrease to a three-year low. Moutai products are considered luxury goods, and cutting prices is never a good sign, raising concerns about the weakness of Chinese consumption.
This issue extends beyond baijiu, as most Chinese consumer discretionary stocks plummeted. Anta and Li Ning, both popular Chinese sports brands, dropped 13% and 20% respectively. Hotpot operator Haidilao saw a 22% drop, while retailer Miniso sank 18%. However, there were bright spots, such as luxury fashion brand Bosideng and retailer Pop Mart, both of which delivered gains over the last month.
We believe these drops are unwarranted, considering the strong revenue growth for these companies. Most are delivering over 20%, and even 30%, revenue growth over the past year, yet their share prices declined. Perhaps the stock market is forward-looking and is pricing in a potential slowdown in revenue growth for consumer discretionary stocks. Even so, the super low PEG ratios of below 0.5 indicate that their earnings growth could halve going forward, and their stocks would still be undervalued. Thus, we see this as a buying opportunity rather than a cause for pessimism. Even for Moutai, we believe that a price below 1,500 yuan is attractively priced. With a PE ratio of 24x, which is below its 5-year average of 40x, it offers a good margin of safety. Of course, there remains a chance for further downside before it recovers, but the exact timing is uncertain.
The Chinese continue to pile up their savings, and according to Financial Times calculations, the Chinese share of global savings has surpassed that of the EU and the US. Almost a third of the world's savings now come from China.
This is the crux of the issue. It's not that the Chinese lack money; they just don't spend, especially when the outlook isn’t bright. Westerners have less money but remain willing to spend. If China wants to be self-sufficient and drive a consumption economy, it needs to instill more confidence in its people to spend more. Culturally, the Chinese are more prudent, so the confidence boost has to be much larger to encourage them to open their wallets.