Bottoms up: China booze makers defy economic gloom

SHANGHAI Thu Oct 25, 2012 11:07pm EDT

SHANGHAI Oct 26 (Reuters) - China's high-end liquor companies raised prices in a faltering economy and faced a Beijing clampdown on drinking their pricey booze at banquets, yet still managed to turn in strong quarterly profits.

Kweichow Moutai Co Ltd, China's leading maker of the potent and expensive baijiu liquor, reported a doubling of its third-quarter net income to 3.4 billion yuan ($544.72 million) on Thursday, beating analysts forecasts of 2.4 billion yuan, according to Thomson Reuters I/B/E/S.

Its biggest rival, Wuliangye Yibin Co Ltd, said last week it expects a nearly 90 percent rise in its third-quarter profit on higher production and robust sales. Wuliangye Yibin will report its results next week.

Repeating that success in the current period may be tough.

Analysts said a government clampdown on using public funds to buy luxury items such as baijiu, announced in March, had a limited impact on high-end liquor firms because of private sector demand and stronger sales of lower-end brands.

But Zhao Yong, an analyst with Haitong Securities, cautioned that the impact of the crackdown on luxury gift-giving could be felt in the coming months.

"There may not be such a big impact now as most of the gifting occurred from the budget set in the first half of the year. However, moving forward there may be a bigger impact seen," he said.

Kweichow Moutai said on Sept. 4 it had raised prices on some of its products by as much as 30 percent from the start of that month. The hike came late into the third-quarter period, so it may have a greater impact on the current quarter's sales.

Moutai shares were trading down 0.5 percent on Friday morning, although they have gained some 34 percent this year. Wuliangye was down 0.4 percent on Friday, taking a nibble out of its 8 percent gain this year.

PESTICIDES AND WINE

Baijiu was the largest category in the global spirits market in 2010, accounting for more than a third of the total, according to a Credit Suisse report this month.

The rise of China's alcohol makers come as China's burgeoning middle class and wealthy become more comfortable splurging on red wine, cognac and baijiu to show off their rising status.

It has continued to grow even as China's economy slowed for the seventh straight quarter during the July-September period, thanks to rising incomes and government policies that supported consumer spending.

Moutai said on Friday it will invest a total of 6.31 billion yuan ($1 billion) in seven projects to expand production capacity.

Foreign brands have enjoyed success too.

Australia's Treasury Wine Estates, which has been pushing its premium wines including Penfolds and Beringer in China with high-end product launches, aims to sell into 100 Chinese cities over the next five years, up from 15 now.

"We have not actually seen any evidence of a real slowdown in Asia at all," Chief Executive David Dearie told reporters this week.

Treasury Wine is the world's second-largest wine company.

Australian government data released last week showed bottled wine exports to China surged 23 percent by value in the year to September, and 16 percent by volume. The same figures showed the category of wine over A$10 per litre saw demand from China grow 37 percent.

Not everyone fared well, however. A media storm over pesticide residue hurt sales at Yantai Changyu Pioneer Wine , a leading maker of red and white wine in China. Its net profit fell 38 percent in the quarter, which the company blamed on negative media coverage and increased marketing costs. ($1 = 6.2417 Chinese yuan) (Additional reporting by Victoria Thieberger in Melbourne; Editing by Kazunori Takada and Emily Kaiser)