China stocks slide to two-week low as Kweichow Moutai’s disappointing earnings set bearish tone

Yujing Liu
·4-min read

China stocks fell to a two-week low as liquor juggernaut Kweichow Moutai’s lacklustre third-quarter earnings weighed on consumer stocks while top cadres of the Communist Party gather in Beijing for a key once-every-five-years policy-setting event.

The Shanghai Composite Index fell 0.8 per cent to 3,251.12 at the close of trading, after tumbling as much as 1.6 per cent. The CSI 300 Index, which tracks the biggest companies listed in Shanghai and Shenzhen, dipped 0.6 per cent. The Shenzhen Component Index rose 0.7 per cent, lit up by the likes of video surveillance giant Hikvision, whose results beat forecasts.

Stock indices in Australia and Japan retreated marginally, while Hong Kong’s financial markets were closed for a public holiday.

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The decline in Shanghai came after the local benchmark index completed two straight weeks of losses. China’s onshore market has been struggling for catalysts to break out of its rangebound trading over the past three months since a surge from March swiftly lifted the index to a two-year high in July.

“Investors are taking profit from blue-chip stocks that have rallied a lot this year, such as consumer companies, and switching into sectors with lower valuations,” said Yang Delong, chief economist at Shenzhen-based First Seafront Fund Management. “This kind of rotation typically happens towards the year-end and should be a temporary [weakness].”

Liquor distillers plunged, setting the tone for the broader market. Kweichow Moutai disappointed investors after posting a 7 per cent gain net profit to 11.2 billion yuan (US$1.7 billion) from a year earlier. It trailed the 11.8 billion yuan consensus forecast, according to S&P Global Market Intelligence. Growth was 13 per cent in the first half of 2020.

Kweichow Moutai, the world’s most valuable distiller by capitalisation, plummeted 4.2 per cent to 1,643 yuan, the biggest daily loss in three months. The stock has still returned 41 per cent so far this year. Wuliangye Yibin, its biggest rival baijiu producer, fell 1.7 per cent in Shenzhen to 232.60 yuan.

The slowdown in Moutai’s growth was a result of slower product shipment, restructuring of sales channels and a softer expansion of the company’s direct sales, Jefferies analyst Mark Yuan said in a note to clients. Earnings growth is likely to accelerate in the fourth quarter and next year, he said, maintaining a “buy” recommendation with a 12-month price target of 2,200 yuan.

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Traders also dumped a number of other high-flying blue-chip stocks.

Chongqing Fuling Zhacai Group, a maker of pickled vegetables and one of the hottest consumer stocks in China, tumbled by as much as 9.3 per cent, before recouping some of the losses to end 3.1 per cent lower at 42.93 yuan. This came after a 10-per cent sell-off on Friday, triggered by a slowdown in third-quarter earnings. The stock has climbed by 62 per cent so far this year.

The four-day plenum of the Communist Party’s 19th congress begins on Monday in Beijing. Top party officials are likely to roll out a five-year plan to set the country’s economic policy agenda through 2025, which could benefit stocks in sectors including consumer and technology, according to analysts.

Security-related stocks rallied in Shenzhen, preventing a bigger setback in the market, as video surveillance giant Hangzhou Hikvision Digital Technology beat market expectations with its third-quarter results. Revenue grew 11 per cent to 17.8 billion yuan from the same period last year, exceeding the 17.3 billion yuan consensus forecast, S&P Global Market Intelligence data shows.

The company’s shares jumped by 9.3 per cent to 42.79 yuan, its highest level since March 2018. Zhejiang Dahua Technology, also a maker of video surveillance products, surged 6 per cent to 21.85 yuan.

Biotech companies also advanced broadly on optimism that a Covid-19 vaccine would be adopted widely in China next year. As many as 300 million people in China may be put on a priority list for vaccination over the coming year, and the gap between demand and supply of the vaccine in the country might stand at 120 million units, China Galaxy Securities said in a report published on Monday.

Beijing Tiantan Biological Products Corp climbed 7.5 per cent to 40.82 yuan, and Shenzhen Kangtai Biological Products added 6.5 per cent to 167.63 yuan.

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