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Liquor leader proves sweet tonic for AA-rated Cortesi

Liquor leader proves sweet tonic for AA-rated Cortesi

Chinese A-shares offer investors a way to tap a huge market, but many have been put off over liquidity concerns and fears of volatility.

However, Citywire AA-rated Jian Shi Cortesi is a fan and one particular Chinese A-share, which is more liquid than most other stocks available, is her fund’s third-largest holding.

‘We bought Kweichow Moutai through the UBS P note. It is a Chinese liquor company and it has remained one of our top holdings for quite a while,’ Zurich-based Cortesi says.

‘They produce Chinese liquor, which is 50% alcohol made from grain, and is consumed in large quantities in China at meals. An average bottle of Chinese liquor sells for about $1-2. Kweichow Moutai sells its liquor for $200 per bottle.’

The UBS P note makes up 3.58% of the GAM Multistock – China Evolution fund and is Cortesi’s third-largest holding. In a country more famous for its tea, Kweichow Moutai has proven resilient despite a hiccup in the market.

‘It is the most prestigious liquor brand in China because of the history and the limited production. It has a gross profit margin of above 90% and a net profit margin of about 50%. It is a real cash cow and one of the most profitable companies. It is also one of the most valuable spirit brands.

‘An opportunity was created for the company in 2013 when China started its anti-corruption campaign. All the liquor stocks collapsed because a lot of these expensive drinks used to be consumed at government banquets. Immediately afterwards you could buy this company at eight times P/E,’ she says. ‘It has never lost money.’

Cortesi is capturing the shift in consumer behaviour towards better quality products. Consumer discretionary is the second-largest sector in her fund at 22.8% and alcohol ties in neatly with this theme.

‘The price of the liquor has kept up with income growth, which is quite hard because since 1999 income has risen 10 times in US dollar terms. It is an amazing company,’ Cortesi says.

‘It is a way to play the consumption upgrade trend. People are not drinking more liquor or more beer, but are drinking better liquor and better beer and eating better food.’

These comments originally appeared in the November edition of Citywire Selector magazine.

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