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Distilleries taste bigger profits by grehh hernjer
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Distilleries taste bigger profits |
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Business,Business News,Business Opportunities
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The Chinese liquor market has grown steadily after a correction and analysts say the strong performance will continue for several more years.
Profit from white liquor increased 30.13 percent in the first six months from the same period of last year. It surpassed the beer and wine markets, which grew about 12 percent in the same period year on year, according to the China Wine Association.
The market experienced a painful correction in 2001, when a new tax required liquor makers to pay according to both price and production quantity.
Many manufacturers slashed production in order to avoid the "double tax." During this stage some small distilleries collapsed and liquor production dropped faster than a drunk falling off a bar stool.
"After the correction, the market entered a relatively steady period of growth," said Fu Su, an industry analyst from Xiangcai Securities Co Ltd. "It will probably last for a few years."
In accordance with cutting production, distilleries shifted focus to premium spirits. Well-recognized national brands enhanced their premium product percentage. Many regional brands that once targeted the lower end of the market also launched a series of premium products.
Jiangsu based Yanghe Group Co Ltd, a famous distillery, that once targeted the lower end of the market, launched Classic Blue - a spirit targeting the middle of the market. Its sales increased 52.8 percent last year compared to 2005.
"In the premier section the profit margin is over 70 percent," said Fu.
According to the China Liquor Association, premium spirits sales accounted for 14 percent of the more than 70 billion yuan liquor market in 2005. Premium spirits accounted for about 68 percent of total profit of 7.3 billion yuan with only 0.5 percent of total sales of 3.5 million tons in 2005.
For those already positioned in the premium section such as Kweichow Moutai and Wuliangye, they can raise prices to increase profit.
Both distilleries raised retail prices early this year. Kweichow Moutai may see net profit grow 20 percent this year because of the price rise, an industry insider said.
"Distilleries will rely more on increasing prices rather than increasing production to boost profit," said Fu.
She added that since premium spirits are purchased mainly as a gift or served on business occasions, it is also wise to maintain current production levels.
In the medium sector of the market, regional brands lead the way since drinking habits differ largely among people in different parts of the country.
Liquor distilled in Sichuan Province is well received for its full body and strong alcohol content while in Shanxi Province lighter spirits are more popular.
The future of the market looks destined for consolidation as more regional brands make the move to compete with the few national brands.
Many foreign companies and investment institutions consider it a good time to cash in on the market, especially through purchasing shares of major liquor companies.
Qualified foreign investment institutions own shares in both Kweichow Moutai and Wuliangye. "Many QFII see liquor shares as very promising," said Fu.
But analysts said that even though the market is still hot, there is a limit to growth.
For newcomers who want to cash in, it might already be too late as share prices of distilleries increased two to three times in recent years as average profit growth reached about 50 percent.
"Share prices are not cheap anymore, the price earnings ratio exceeds 30 with not much room for further growth," said Zhang Qi from Haitong Securities. "Maybe company profit will keep growing to a certain extent, but share prices may remain stable."
Meanwhile, beer consumption has grown at more than six percent annually since 2002. According to media reports, average domestic consumption is close to 22 liters per capita annually - average world consumption is 30 liters and in Western countries it surpasses 80 liters.
In the wine section, from 1990 to 2004, consumption grew at 10 to 14 percent annually. Analysts expect growth to remain in that range as emerging middle income groups are young and tend to drink wine over traditional Chinese spirits. I am China Textile and Leather writer, reports some information about golf club travel bags , nike sasquatch 460 driver.
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