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High-end Chinese baijiu stocks outperform the market

Three of the top ten global liquor companies are based in China. Kweichow Moutai, Wuliangye Yibin and Yanghe have all consistently outperformed their competitors since 2018, with demand driven by China's growing middle class.

Baijiu is one of the traditional Chinese grain spirits, with huge popularity in the region. It typically has an alcohol content of 40-60% and a fermentation period of about 5 years. A bottle of high-end baijiu can cost up to a few hundred US dollars.

Three of the top ten alcohol companies, according to market capitalization, are baijiu producers Kweichow Moutai, Wuliangye Yibin and Yanghe. All have seen remarkable growth in the past five year of 474.77%, 514.96% and 142.6%, respectively. Baijiu makers have performed significantly better than other alcohol sector stocks. Kweichow Moutai is the overall leader. It ranks highest with a market cap of $390.68bn. It has the highest brand value among all alcohol companies and it overtook Diageo as the world's largest distiller in April 2017.

The success of Chinese liquor companies is aligned with increasing wealth in the region, and a climate where investors seek alternate options such as liquor.

Baijiu stocks have triumphed over competitors

Stock returns for 10 alcohol companies with largest market capitalization

Luxurious drinks

High-end baijiu is a staple during Chinese business and official dinners. The country has a preference for spirits over other alcoholic drinks. According to the World Health Organisation, spirits have consistently been the top consumed drink in the region, above wine and beer.

This is reflected in China’s list of most valuable brands, as noted by Hurun. Kweichow Moutai has occupied the top spot since 2019. In 2021, Wuliangye Yibin joined Kweichow Moutai at the top of the list.

The stocks of the three large baijiu producers have outperformed their global competitors since 2018, despite government intervention. In 2012, lavish gift giving among civil servants was outlawed. In 2016, civil workers were banned from consuming alcohol during working hours. Although liquor company stocks suffered for a while after these interventions, long-term growth persisted.

China sees biggest revenue from baijiu sales in 2020

2020 Chinese market breakdown by revenue and production

Iris Pang, chief economist at ING, told that the reason for the three companies’ share price increase in recent years can be credited to the investment climate in China. She called it “a sign of the lack of investments”, adding: “Investing in real estate is quite uncertain for now, so some investors move to alternative investments, which includes liquor.”

The rise in demand for these alternate investments has coincided with the rise in a specific demographic with a high level of disposable income.

Growing middle class

China has sustained a constant level of economic growth in recent years, growing its gross domestic product (GDP) by almost 6% since 2019.

As China’s GDP rises, so does the number of individuals with disposable income. According to a survey by Mckinsey. China accounted for 31% of global household consumption growth from 2010 to 2017. Furthermore, households considered middle class and above have grown by 41% between 2010 and 2018.

The middle class population is rising in China

Annual household disposable income for China’s urban population

According to Pang, due to the rise in the middle class, Asia and particularly China is now an important market for luxury goods. “Yes, the rising middle class are the main new buyers of luxurious goods,” she said. “Starting from China to Vietnam, we see more new buyers chasing the very luxurious fashion trend.”

A research paper published by Bain and Company expects Asia to become one of the top regions for luxury item sales. They add that since the pandemic, this will mainly be through online sales.

Changing tastes

The Mckinsey survey also pointed out increased baijiu and spirits consumption among young spenders – about 50% had increased their baijiu consumption between 2017 and 2018.

In 2006, the Chinese government introduced a regulation to prohibit selling alcohol to minors, but the penalties were never specified, according to research published by The Lancet. They point out that, as of 2010, 42% of men and 71% of women abstain from alcohol, although the consumption level for those who do drink is one of the highest in the world, surpassing that of the UK, Sweden, Germany, Australia and Germany.

According to an outlook on the Chinese market for 2022 by Jefferies, there is an expectation for mid-range baijiu to be replaced with other flavours. They expect the demand for high-end baijiu to remain stable. Per research by Mira Asset Securities Research, as of 2021, baijiu is the largest segment in the alcohol industry by value, accounting for 67% of the market, while beer and wine hold only 16.9% and 1.4% of the market. They expect the baijiu segment to grow by 10.2% by year 2025. However, since growth in beer and wine segments are expected to be higher, at 10.3% and 14.8%, there remains a question as to how the alcohol and baijiu industry in China will shape out to be in the future.

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