Saturday, June 6, 2015

Update on Kweichow Moutai

Moutai stock price is up 130% from its 2014 bottom, and 50% from when I bought.  Two reasons:

  • Good Q1 results: revenue up 15%, operating profit up 30% and EPS up 21% (due to share dilution).  No increase in receivables.  Perhaps the start of a new uptrend after two years of stagnant results?
  • A frenzied bull market in China stocks, encouraged by the government.  Mostly driven by retail traders.  And no one knows how much leverage.

 (Banana seller trading - ZeroHedge)

Moutai is not up for the reasons I bought it.  But better to be lucky than smart.

My gut feeling is that the bull market will continue, as the government needs it to paper over their other problems, take over from their housing bubble, and possibly raise capital for their banks. But expect 10-20% corrections as it pauses to let some air out.

Small caps have been the target of the frenzy, not Moutai directly.  Large caps may benefit from upcoming inflows from foreign ETFs such as Vanguard.

The China bull market has been crazy - no point trying to predict when it will end.  Moutai is still trading at reasonable valuation (~16 times expected 2015 earnings), with excellent cashflow and balance sheet.

I'll hold for now, given its a small position, and the risk reward balance is favourable.  But keep in  mind that all bubbles end.  When it pops, I may not be able to get my money back due to the Shanghai Connect daily quota limit.