(Bloomberg) -- Kweichow Moutai Co.’s shares have more than doubled since late last year as the maker of baijiu liquor repeatedly hit fresh records. But by one measure, the rally may be under threat.
A 123% advance since October 2018 has increased the Chinese firm’s market capitalization to about $208 billion, making it the world’s most valuable distiller and one of the country’s biggest listed companies. Moutai has climbed to an all-time high 28 times this year as investors piled into a stock that’s widely considered a safe harbor.
It’s also made the shares more expensive, with the company trading at close to 30 times estimated earnings for the next 12 months. That level has been its valuation ceiling for a decade, preceding double-digit percentage losses when the multiple trades around that line.
Adding to the uncertainty are the firm’s third-quarter results, which showed revenue growth slowed from earlier this year. All but two of 42 analysts covering the stock recommend buying it, but their average price target implies a gain of slightly more than 8% in the next 12 months.
“The share price rally is not sustainable,” said Allen Cheng of Morningstar Inc., the only analyst with a sell rating. “The company has good fundamentals, but they’re well reflected in the current share price and it’s hard to imagine that the pace of the rally will last.”
Moutai’s Flying Fairy liquor, which has a 53% alcohol content and goes for about 1,500 yuan ($212) a bottle and up, is China’s national drink and a staple for gift-giving. As a stock, Moutai is viewed as shielded from economic and geopolitical risks. It’s jumped close to sevenfold since mid-2015, pushing the firm’s capitalization above companies such as PepsiCo. Inc. and Boeing Co.
But valuations have reached a high water mark that’s been tested three times in the past decade, with the stock falling each time.
When price to estimated forward earnings hit 29.5 in August 2009, the stock dropped 12% in a week. When it passed the 30 threshold in November 2010, the shares sank 20% in the next six weeks. Seven years later, Moutai plunged 14% in less than two weeks after getting close to touching the 30 level.
In the long term, the stock rebounded from the losses, and analysts say the same will happen this time. Moutai is down 3.5% since it last reached a record high on Oct. 15.
The company’s attempt to transition to direct sales from a distributor model may cause short-term pressure on the share price, according to Mark Huang, a Hong Kong-based analyst at Bright Smart Securities. Moutai has been cutting some distributors, with an analyst from Sanford C Bernstein saying it’s struggling to replace them.
But for Huang, the company’s status as the maker of China’s most popular liquor will support the stock in the long run. If that turns out to be true, it’s good news for investors in the Global X MSCI China Consumer Staples exchange-traded fund, which is almost 10% invested in Moutai and has gained 40% this year. The fund is among the top 10 performers of the 1,911 U.S. non-leverage ETFs in 2019.
“Since its valuation is a bit high, in the short term the share price will face downward pressure,” Huang said. Still, as long as return on equity and margins remain high, the stock will continue to rise, he said.
To contact the reporter on this story: Elena Popina in Hong Kong at epopina@bloomberg.net
To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Tom Redmond, Philip Glamann
©2019 Bloomberg L.P.
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