Commentary on Political Economy

Monday, 7 September 2020


A Bubble Scarier Than Big Tech Is Brewing in China

Valuations in the food and beverage sector have skyrocketed as institutional investors pile in.

What goes up...
What goes up... Photographer: Kevin Frayer/Getty Images AsiaPac

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.

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.  

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. 

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. 

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. 

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.

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. 

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. 

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. 

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. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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