Tue, Apr 11, 2017 page10

• Vice stocks back after Xi campaign

  • Bloomberg
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  Industries that suffered under Chinese President Xi Jinping’s (習近平) anti-corruption campaign are thriving again.

  Shares of Macau casino operators have clawed their way back to the highest level since August 2015 as VIP takings recover, and makers of pricey spirits, which became a symbol for official excess, are almost trading at multi-year highs.

  Even Chinese imports of Swiss watches are looking buoyant, jumping 28 percent in December last year alone, as demand rebuilds in the wake of the Chinese Communist Party’s crackdown on conspicuous spending.

  

  A Tissot PRS 516 T-Sport luxury wristwatch, produced by a unit of Swatch Group AG, is on display in Basel, Switzerland, on March 22.

  Photo: Bloomberg

  Much of the investor confidence could be attributed to the success of industry efforts to target the mass market, rather than relying on the cashed-up elite.

  For example, casinos shifted to courting tourists and building family-friendly facilities in Macau, while Kweichow Moutai Co (貴州茅台酒) cut prices of its premium liquor to make it more affordable, an approach emulated by Swatch Group AG, which introduced more economical models.

  Bolstering their outlook is a perception that Xi’s campaign is losing its immediacy, according to Sun Hung Kai Financial Ltd (新鴻基金融集團).

  “Anti-corruption remains a concern to those stocks, but it’s no longer a top concern,” Hong Kong-based Sun Hung Kai Financial strategist Kenny Wen (溫傑) said.

  Demand from the mass market has given these industries a “new growth engine,” he said.

  It is easy to see why investors are optimistic: Growth in Macau’s casino revenue jumped 18 percent last month, the fastest pace in eight months, as both high rollers and leisure gamblers flocked to the territory. Kweichow Moutai said in February it expected first-quarter net income to climb about 16 percent to 5.7 billion yuan (US $825.1 million).

  Such a turnaround is remarkable given the pressures that affected the industries near the start of Xi’s presidency.

  Macau gambling revenue fell every month for more than two years straight beginning in mid-2014, a stretch that included a record 49-percent plunge in February 2015.

  This helped drag shares of companies such as Galaxy Entertainment Group Ltd (銀河娛樂集團) and Sands China Ltd (金沙中國) down more than 65 percent from their peak.

  The crackdown on graft also reverberated through the alcohol industry.

  Five years ago, government-related sales accounted for about 70 percent of the total at premium spirits distillers Kweichow Moutai, Wuliangye Yibin Co (五糧液) and Luzhou Laojiao Co (瀘州老窖), according to Sanford C Bernstein & Co.

  That has fallen by up to 10 percent, Hong Kong-based Bernstein analyst Euan McLeish said, citing meetings with the companies’ management.

  “The structure of demand has fundamentally changed,” McLeish said. “What has become increasingly apparent is that there is underlying demand from individuals. That’s really why the interest in those stocks picked up so much.”

  The Bloomberg Intelligence Macau/China Gaming Market Competitive Peers Index rose 0.3 percent at 9:36am local time, in its sixth day of gains. Kweichow Moutai sipped 0.2 percent.

  There are concerns that gains in vice stocks have been too far, too fast.

  Galaxy has surged 60 percent in the past 12 months, the third-best performance on Hong Kong’s Hang Seng Index. Its shares trade at 26 times projected earnings, 42 percent above its five-year average.

  Kweichow Moutai and Wuliangye have gained more than 50 percent in that time, five times the pace of China’s CSI 300 Index.

  “Casino stocks have almost fully priced in an industry recovery this year, so shares may end the year roughly unchanged,” Hong Kong-based strategist with CMB International Securities Ltd (招銀國際證券) Daniel So (蘇沛豐) said.

  Arthur Kwong (鄺樂天), Hong Kong-based head of Asia-Pacific equities at BNP Paribas Investment Partners Asia Ltd, says enthusiasm toward casinos would quickly dim if the State Council of the People’s Republic of China rolls out tough measures to curb capital outflows.

  In addition, Xi’s drive to clean up official corruption has not gone away, even if investors are less worried about the impact as the campaign enters its fifth year.

  About 415,000 officials were punished last year, a 23 percent increase from the previous year, according to government statistics.

  Still, analysts are bullish: Galaxy has 20 buys and just one sell rating, while Kweichow Moutai has 26 buys and zero sells.

  JPMorgan Chase & Co analyst Ebru Sener Kurumlu forecasts the spirit maker is to lift sales by about 11 percent this year, while Hong Kong-based chief investment officer at Foundation Asset Management (HK) Ltd (邦德資產管理) Michael Liang (梁江) sees the recovery continuing.

  “With the improving economy, soaring home prices and growing luxury car sales, I see the big picture,” Liang said. “It is a consumption upgrade.”
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