Analysts are interpreting the latest sell-off in China's leading stock Kweichow Moutai as a harbinger of a market bottom after the alcoholic beverage giant's shares posted their biggest drop in almost a year.
Over the past decade, big drops in the stock have been followed by gains for the benchmark index. The CSI 300 index rose nearly 6 percent in the 12 months following a 19 percent drop in Kweichow Moutai shares in September 2013. The benchmark index gained 23 percent over the following year after the stock lost a quarter of its value in October 2018. In the most recent case, the CSI 300 rallied 15 percent in the six months following Kweichow Moutai's 23 percent drop last October.
"Historically speaking, it's kind of a prerequisite for the market to bottom out," said Wang Chen, partner at Xufunds Investment Management in Shanghai. “Sell-offs start first with companies with mediocre fundamentals and then spread to the hottest deals. When that happens, it means that the selling pressure is fading and coming to an end, and the market bottoms.”
Kweichow Moutai, which produces China's most famous baijiu liquor under the same brand, is an investor favorite due to its strong track record of earnings growth and history of regular dividend payments. It is the second most valuable stock in China's domestic markets, with a capitalization of 2.07 trillion yuan (US$282 billion).
The distiller's shares fell 5.7 percent on Thursday in Shanghai, their biggest drop in almost a year, sending analysts scrambling to explain what went wrong. Before that, the stock had been largely flat so far this year, outpacing the benchmark CSI 300 index's 6.7 percent decline.
While some said investors were aligning the company's valuations with the broader market, others said it was an indicator of China's growth story.
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"Foreign funds have been selling it," said Hong Hao, chief economist at Grow Investment Group. "Moutai is an important stock, but it is more of a sign of what foreign investors think of China."
HSBC analysts said in a note that the company's revenue growth target of around 15 percent by 2023 could be achieved, and their 2,202 yuan price target for the company's shares was a third higher than the current levels.
"The company has been increasing the direct sales rate of Moutai products and expanding its distribution sales rate of Xiliejiu products," the analysts wrote in a report in August. “If Moutai maintains greater market control over its core products, overall margins could continue to increase. We expect Moutai, as a leading baijiu company, to gain more market share and are optimistic about its strong fundamentals and long-term growth visibility.”
Kweichow Moutai shares rose 0.9 percent to 1,645 yuan on Friday in a weak market. The CSI 300 index fell 0.7 percent to a new one-year low, while the Shanghai Composite Index fell by the same margin, closing below the 3,000-point threshold for the first time in 11 months.
Kweichow Moutai is the top choice among China's baijiu industry, according to Citigroup, which said its launch of the Sauce-scent Latte crossover product showed its determination to innovate and would strengthen its brand among younger consumers.
"Despite the negligible contribution to profits, those innovative crossover products have amplified Moutai's recently elevated efforts in innovation and communication with young demographics, well differentiating the company from most of its baijiu peers," he said. the US bank in a report last month.
"Sentiment is weak because there is no change in liquidity and foreign capital flight offsets other tailwinds," said Song Yiwei, an analyst at Baohai Securities in Tianjin. "As the stock index continues to decline, investors should not be too pessimistic and wait patiently for the market to stabilize."
