Kweichow Moutai: does sell-off signal China’s beleaguered stock market is about to turn around?

Kweichow Moutai, a prominent Chinese company that produces the renowned baijiu liquor, recently experienced a significant sell-off in the stock market. This event has led analysts to speculate that it could be an indicator of an impending market turnaround. This theory is based on historical patterns where major declines in Kweichow Moutai's stock have been followed by gains in the benchmark. For instance, in September 2013, a 19% slump in Kweichow Moutai's shares was followed by a 6% rise in the CSI 300 Index over the next 12 months. Similarly, in October 2018, the stock lost a quarter of its value, but the benchmark gained 23% over the ensuing year. The most recent occurrence was last October when Kweichow Moutai's shares slumped by 23%, and the CSI 300 rallied 15% in the subsequent six months. Kweichow Moutai is a favourite among investors due to its consistent earnings growth history and regular dividend payouts. It is the second-most valuable stock in China's onshore markets, boasting a capitalisation of 2. 07 trillion yuan (US$282 billion). However, the distiller's shares tumbled 5. 7% on Thursday in Shanghai, marking its steepest decline in nearly a year. This unexpected downturn led analysts to scramble for explanations. Prior to this, the stock had been largely flat year-to-date, outperforming the benchmark CSI 300 Index's 6. 7% slide. Some analysts believe that investors were aligning the company's valuations with the broader market, while others view it as a proxy for China's growth narrative. Despite speculations that Kweichow Moutai's third-quarter earnings might fall short of analysts' estimates, the company has refuted these claims, stating that business operations were normal. Profits for the quarter ending in September rose 15. 7% from a year earlier, albeit at a slower pace than the 21% increase for the previous three-month period. HSBC analysts have expressed optimism about the company's future, stating that the company's revenue growth target of around 15% for 2023 is achievable. They also set a price target of 2,202 yuan for the company's stock, which is a third higher than the current levels. The company has been increasing the ratio of direct sales of Moutai products and expanding its distribution sales ratio of Xiliejiu products. If Moutai maintains stronger market control over its core products, overall margins could continue to rise. The expectation is for Moutai, as a leading baijiu company, to gain more market share, given its robust fundamentals and long-term growth visibility. On Friday, shares of Kweichow Moutai were up 0. 9% at 1,645 yuan in a weak market. The CSI 300 Index dropped 0. 7% to a fresh one-year low, while the Shanghai Composite Index fell by the same margin, closing below the 3,000-point gateway for the first time in 11 months. Kweichow Moutai is the top pick among China's baijiu industry, according to Citigroup, which said its launch of crossover product Sauce-scent Latte showcased its determination to innovate and would build up its branding among younger consumers. Despite the insignificant earnings contribution, those innovative crossover products have amplified Moutai's recently elevated efforts on innovation and communication with young demographics, which well differentiates the company from most baijiu peers. The sell-off in China's equity markets has continued despite improving economic indicators. Data released last week showed China's economy expanded by a better-than-estimated 4. 9% in the third quarter, and both retail sales and industrial production exceeded expectations in September. Overseas investors have sold 37. 26 billion yuan of Chinese stocks via the exchange link with Hong Kong in October, adding to an aggregate 127 billion yuan of outflows over the past two months, according to Bloomberg data. Sentiment is weak because there is no turnaround in liquidity and the flight of foreign capital offsets other tailwinds. As the stock index keeps refreshing lows, investors shouldn't be too pessimistic, and patiently wait for the market to stabilise.