A Bubble Scarier Than Big Tech Is
Brewing in China
Brewing in China
Valuations in the food and beverage sector have skyrocketed
as institutional investors pile in.
as institutional investors pile in.
By Shuli Ren
September 7, 2020, 12:57 AM GMT+1
In China, an even scarier bubble than Big Tech is brewing.
It's engineered not by the nation’s notorious mom-and-pop investors, but
professional stock pickers.
It's engineered not by the nation’s notorious mom-and-pop investors, but
professional stock pickers.
These days, even a soy sauce maker can be valued at 100
times earnings. And this is no penny stock: Foshan Haitian Flavouring &
Food Co. is a blue chip with an $81 billion market cap. From pig farmers to
manufacturers of China’s famous fiery liquor, the food and beverage industry
has surpassed banks as the heavyweight in the benchmark CSI 300 Index. On
average, the sector has rallied 60% this year.
times earnings. And this is no penny stock: Foshan Haitian Flavouring &
Food Co. is a blue chip with an $81 billion market cap. From pig farmers to
manufacturers of China’s famous fiery liquor, the food and beverage industry
has surpassed banks as the heavyweight in the benchmark CSI 300 Index. On
average, the sector has rallied 60% this year.
This trade started to unwind last week. On Thursday, without
warning, Foshan Haitian tumbled off its record high. The selloff widened to the
entire sector Friday. Foshan dropped 14% in two days.
warning, Foshan Haitian tumbled off its record high. The selloff widened to the
entire sector Friday. Foshan dropped 14% in two days.
Unlike the retail-focused tech names in Shenzhen, these blue
chips are chased by institutional investors. Mutual fund managers have
allocated 11.8% of their money to food and beverage stocks on average, second
only to healthcare, data compiled by Haitong Securities Co. show.
chips are chased by institutional investors. Mutual fund managers have
allocated 11.8% of their money to food and beverage stocks on average, second
only to healthcare, data compiled by Haitong Securities Co. show.
This comes just as mutual funds are raising money at record
pace — at over 2 trillion yuan ($292 billion) from January to August, that’s
more than all of 2019. No surprise, hybrid and stock funds got the lion’s
share. This year’s bull market boosted managers’ performance, which in turn
attracted inflows.
pace — at over 2 trillion yuan ($292 billion) from January to August, that’s
more than all of 2019. No surprise, hybrid and stock funds got the lion’s
share. This year’s bull market boosted managers’ performance, which in turn
attracted inflows.
All that money has to go somewhere. Much as Beijing has
advocated investing in young hard-tech stocks, professionals are still
apprehensive. More than half of their money is allocated to companies on the main
boards, which have profitability requirements.
advocated investing in young hard-tech stocks, professionals are still
apprehensive. More than half of their money is allocated to companies on the main
boards, which have profitability requirements.
Food and beverage companies have become investor darlings
thanks to their predictable cash flows. Take Foshan Haitian, for example. Its
sales growth has been consistently above 10% since 2012, while its profit has
been expanding even faster. Buying Foshan is akin to holding corporate bonds
with a 10% to 20% coupon rate, wrote Bank of China Ltd. in a recent report.
thanks to their predictable cash flows. Take Foshan Haitian, for example. Its
sales growth has been consistently above 10% since 2012, while its profit has
been expanding even faster. Buying Foshan is akin to holding corporate bonds
with a 10% to 20% coupon rate, wrote Bank of China Ltd. in a recent report.
That may well be, but
an influx of money for a limited number of shares is making this space crowded.
Foshan, for instance, has a free float of just 14%, as its controlling
shareholder holds a 58% stake. With floats of 26% and 33%, baijiu makers
Kweichow Moutai Co. and Wuliangye Yibin Co. aren’t much better. As a result, a
price-to-earnings ratio of 50 times has become the norm in this sector.
an influx of money for a limited number of shares is making this space crowded.
Foshan, for instance, has a free float of just 14%, as its controlling
shareholder holds a 58% stake. With floats of 26% and 33%, baijiu makers
Kweichow Moutai Co. and Wuliangye Yibin Co. aren’t much better. As a result, a
price-to-earnings ratio of 50 times has become the norm in this sector.
To their credit, professionals still care about profit
forecasts. But at what price? Food companies’ earnings yields are now well below what China’s 10-year government
bonds offer, which rose above 3% last week.
forecasts. But at what price? Food companies’ earnings yields are now well below what China’s 10-year government
bonds offer, which rose above 3% last week.
Money managers are having a tough time navigating the bull
market this year. A lack of market depth aside, they have to find ways to not
only beat the benchmark but also their peers. In China, actively managed stock funds reported an average 45%
return in the first eight months. This entire industry has thus been put on
a spinning wheel, perpetually looking for growth and paying an exorbitant
price for it. All it takes is a further jump in bond yields, and the
market’s shooting stars will come crashing down to earth.
market this year. A lack of market depth aside, they have to find ways to not
only beat the benchmark but also their peers. In China, actively managed stock funds reported an average 45%
return in the first eight months. This entire industry has thus been put on
a spinning wheel, perpetually looking for growth and paying an exorbitant
price for it. All it takes is a further jump in bond yields, and the
market’s shooting stars will come crashing down to earth.
This column does not necessarily reflect the opinion of the
editorial board or Bloomberg LP and its owners.
editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Shuli Ren at sren38@bloomberg.net
To contact the editor responsible for this story:
Rachel Rosenthal at rrosenthal21@bloomberg.net
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