China white spirits rally sours on safety scare

By Clement Tan

HONG KONG, Nov 21 (Reuters) – Shares in Chinese liquor makers have fallen sharply, reversing some this year’s stellar gains, on a contamination scare following reports that a maker of white spirit added more plasticisers to its products than industrial standards allow.

This week’s sell-off of shares, which had outperformed the market until November, followed a report carried by several mainland media outlets, citing tests conducted by an international third-party that claimed Jiugui Liquor exceeded the levels of plasticisers allowed.

Plasticisers are additives that increase the fluidity of a material, but are also toxic chemicals that can cause damage to men’s reproductive health and cause early female puberty when consumed over a long period.

Shares of Wuliangye, a producer of premium “baijiu,” or white spirit, fell 6.8 percent this week and are among the biggest drags on China’s CSI300, an index of the top Shanghai and Shenzhen listings.

Larger rival Kweichow Moutai, whose Shanghai shares were up as much as 28 percent this year at the end of October, has seen this year’s gains cut to 13.1 percent.

In comparison, the CSI300 and Shanghai Composite indexes are set for a third consecutive annual loss and are now down 6.4 and 7.7 percent on the year, respectively.

Moutai shares are poised to record their worst monthly performance since April 2010, while Shenzhen-listed Wuliangye is set for its biggest monthly loss in four years.

Jiugui shares have been suspended since Monday.

The official Xinhua news agency reported late on Wednesday that the highest reading of plasticisers from Jiugui product samples tested by Hunan provincial authorities was 1.04 mg/kg.

This falls well within the acceptable 0.495-2.32 mg/kg range the China Alcoholic Drinks Association listed in a statement on Monday, adding that higher-end alcoholic drinks contain higher levels of plasticiser.

Attempts to reach officials at Jiugui Liquor for comment were unsuccessful.

In a note to clients on Wednesday before official test results were released, Credit Suisse strategists said while the presence of plasticisers is a common food safety issue for most baijiu companies, investors may have overreacted to the latest news reports.

Plasticisers can sometimes be injected into products when plastic barrels are used for storage during the manufacturing process, Credit Suisse added.

Nevertheless Credit Suisse said now is not time to buy Wuliangye and Moutai shares since the industry faces weaker demand.

Baijiu distributor Silver Base Group Holdings slumped 11.3 percent in Hong Kong on Wednesday after it warned that it expects to record a loss for the six months ending September led by the economic slowdown and the low season in the baijiu market in China.

Shares of baijiu makers have been on the backfoot since last month on worries over high inventory levels and fears that strong anti-corruption move would sap demand for the expensive bottles often used as gifts to local government officials.

Anti-corruption calls by China’s top leaders in the past two years have hit the shares of premium alcohol producers, but weakness has rarely been as protracted as it has been in November.

“We know baijiu stocks are a proxy for corruption in China,” said Hong Hao, Bank of Communications (BoCom) International Securities’ head of China research.

“If you look at the market data, people are not shorting the sector, they are actually reducing their stakes and these are people who’ve been invested for a long time,” Hong added.

(Editing by Matt Driskill and Louise Heavens)