Liquor giant Kweichow Moutai Co.’s buoyant first quarter earnings is the latest sign that China’s demand for luxury goods is resilient, a relief for global brands dependent on the Asian nation to drive growth.
The maker of fiery baijiu drink reported a gain in profit for the first quarter as demand held up in the face of restrictions and travel curbs that kept people from social gatherings. First-quarter net income for the world’s most valuable distiller rose 16.7% to 13.1 billion yuan, the company said in a filing on Monday. Total revenue rose 12.8%.
Moutai’s solid earnings, amid a pandemic that’s caused a deep economic downturn worldwide, is the latest good news from luxury-goods makers. LVMH and L’Oreal SA are seeing a quick recovery in China revenue as pent-up demand fuels sales at re-opened stores on the mainland.
Moutai’s stock, an investor favorite, jumped as much as 1.5% in Tuesday trading. Shares have rallied more than 20% since March 17 as China – where the epidemic first emerged in end-December – began to ease containment restrictions.
French consumer giants LVMH and L’Oreal SA said earlier this month that a recovery could start soon after the coronavirus caused sales to plunge in the first quarter, as revenue in China is already bouncing back. L’Oreal Chief Executive Officer Jean-Paul Agon said that sales in China – the world’s biggest market for luxury goods – turned positive in March and were on track for a gain of 5% to 10% in April.
LVMH, the owner of Louis Vuitton and Dior, flagged a rapid acceleration in mainland China in April as shoppers clamored to make purchases delayed by lockdowns. Sales in mainland China turned positive in April for Gucci owner, Kering, buoyed by the repatriation of tourist spending and pent-up consumer demand.
But with the Chinese economy shrinking for the first time since at least 1992 last quarter, many consumers are expected to rein in spending. That’s cast doubt on whether the current bout of catching up on purchases thwarted by quarantine measures signals a durable rebound.
The current bounce – or rebound – in the Chinese consumer demand will help global luxury-goods makers mitigate the sales hit in the U.S. and European markets as these nations continue to battle the virus.
The growth in Moutai’s revenue, which relies almost solely on the domestic market for revenue, came despite restaurants and bars staying shut through most of the first quarter.
The scarcity of the high-end baijiu helped keep demand strong. Consumers still sought out Moutai’s fiery liquor, which is highly coveted by the growing middle class. The results are a testament to the drink’s staying power throughout the crisis, and consumers’ ability to get access to baijiu bottles despite the restrictions.
Citigroup Inc. analysts including Xiaopo Wei lifted their target price for Moutai by 29% to 1,450 yuan after the better-than-expected earnings and said the distiller provides an unique opportunity for investors in China’s consumer staple sector, given its resilient growth amid volatile market conditions.
Moutai, like fellow premium baijiu maker Wuliangye Yibin Co., also benefited from lucky timing with Lunar New Year, traditionally their peak sales season of the year, falling earlier than usual this year with the holiday starting on Jan. 24. By the time the coronavirus epidemic broke out in earnest in China — the central Chinese city of Wuhan was sealed off on Jan. 23 — distributors had already completed their orders.
So when retail prices of bottles fell in February and March as the epidemic shut down China’s economy, it was distributors whose profits were hurt and not the distillers.
Wuliangye reported 19% profit growth for the first quarter and Jefferies Hong Kong Ltd. analysts raised their target price and earnings estimate for the year for Moutai’s rival. Wuliangye shares rose as much as 4.5% on Tuesday.
The positive results may be a hopeful sign for the rest of the year. Moutai had set a more modest sales growth target of 10% for this year, after revenue rose about 15% for 2019, missing analyst estimates for the first time since 2015. The disappointing results raised concerns that consumer sentiment in China was weakening even before the virus outbreak hit the market. Daniela Wei, Bloomberg
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