Liquor producers making a comeback

Investors who congratulated themselves for their keen political sense in dumping Chinese liquor shares may want to reconsider.

Subdued by the government's anti-corruption campaign, the once high-flying distillers are set to rise again. And their prospects have been noticed by stock analysts.

"We are recommending the distiller shares," said ZhaoLin, food and beverage analyst at UBS Securities.

The latest surge in the shares of major liqu or producers pushed their average multiple to 15 times earnings from below seven just a few months ago, and there is room for further gains, analysts said.

"We believe that the negative fact ors that depressed prices of liquor producers' shares were largely discounted in the earlier slump," said Zhao.

"Prospects for the Chinese liquor sector have turned from negative to positive", she added.

Distillers with well established brand names and strong distribution capacity may achieve above-average growth, analysts said. The sector is due for a re-rating because it is undergoing a trans formation featuring State-sponsored reform and industry rationalization through mergers and acquisitions.

Shares of Kweichow Moutai Co Ltd are up about 25 percent since mid-November, when the Shanghai-Hong Kong Stock Connect program began. On Thursday, the shares closed at 192.7 yuan ($31.1), but that was still significantly below its peak of 240 yuan in late 2012.

Rival Wuliangye Yibin Co Ltd is up 37 percent in the past three months, closing at 24 yuan on Thursday.

Baijiu (white liquor) producers' shares were favorites among domestic and foreign institutional investors because of the irunique appeal to high-end drinkers, which provided stable net cash flow.

But the sector, including leaders such as Moutai and Wuliangye, was hard hit by the anti-corruption campaign that effectively kept their products off the table at official dinner parties.

Recent share price gains, however, suggest that investors' confidence has been revived by changing corporate strategies.

"Mass consumption and business banquets are making up for the losses in the official banquets and gift market," Zhao noted.

A top Moutai executive told reporters recently that the company may restructure its subsidiaries' shareholding structures by introducing strategic investors. It may also spin off second-tier brands for separate management.

Analysts said the restructuring of share holdings could improve management efficiency, but the real key to successful reform is better management overall, which cannot be achieved simply by introducing funds.

"First-tier Chinese distillers are controlling their out-put to maintain prices, which will improve the companies' long-term earnings capacity. The valuations of Moutai and Wuliangye are still at low levels compared with their potential," said a research note by investment bank China International Capital Corp.