Stock price boom raises hopes for liquor firms

Soaring stock prices of Chinese liquor brands since the beginning of the year have raised expectations of a recovery in the liquor sector, strengthened by Diageo's increased stake in Sichuan Shuijingfang, the Shanghai-listed Chinese liquor brand.

Diageo, the world's leading premium drinks company, on Feb 26 launched a partial tender offer to SJF to increase its aggregate equity stake in SJF from 60 percent to up to a maximum of 70 percent.

The offer price is 45 yuan ($6.7) per share. The tender offer's maximum value is 2.1 billion yuan.

In July, Diageo- with a collection of brands of spirits and beers including Johnnie Walker and Crown Royal - made a proposal for a partial tender offer to increase its equity stake in SJF from about 39.7 percent to up to 60 percent at an offer price of 62 yuan per share.

SJF, which has liquor products under the Swellfun brand with wine products including Swellfun Diancang, Swellfun Jingtai, distributes its products in both the domestic and overseas markets.

The recent stake increase in SJF is considered a reflection of its good performance last year.

According to an SJF announcement, the company forecasts higher than expected profits and revenue in 2018. Its net shareholder profit increased 73 percent year-on-year or 243.96 million yuan and revenue grew 38 percent or 770.7 million yuan.

Though the sales volume decreased 13 percent, or 1,353.89 kiloliters, its medium-to-high-end liquor sales grew 27 percent, or 1,487.7 kiloliters.

Cai Xuefei, a liquor industry expert, said the move would further enhance Diageo's penetration of China's liquor market amid a very active consumer market environment. It shows Diageo's confidence in the potential growth of the Chinese consumption market as well as SJF's growth potential.

Compared with the leading liquor maker Kweichow Moutai Group, SJF is still weak in its star products, brand history and brand value, not to mention national influence. Cai said SJF is still a regional phenomenon in the southwestern market. He suggested the producer should strengthen its product portfolio through expansion of its middle-range brands to mitigate the risk from single brand operation.

However, Zhu Danpeng, an independent food and beverage analyst, said SJF is too radical in prioritizing high-end liquor products when its brand awareness, brand value and distribution capacity still require more effort.

Zhu said SJF's strong growth in terms of profits might be brief due to its sheer size and relatively low brand awareness.

According to Guangzheng Hang Seng, a securities enterprise, the sound start to the year for Chinese liquor companies is a result of their healthy inventories and shows their confidence in the next round of new product development. The sector is expected to continue to grow.