Sichuan Swellfun (600779.SH), one of China’s leading makers of white spirits, or baijiu, suspended trading of its shares until March 2 pending an announcement concerning Diageo’s investment in Sichuan Quanxing Group, Swellfun’s parent. Diageo is expected to increase its 49% holding in Sichuan Quanxing to a controlling stake. The remaining 51% of the company is currently owned by Chengdu Yingsheng Investment.
Diageo was first of the foreign beverage giants to enter China’s baijiu market bought a 43% stake in Sichuan Quanxing from Chengdu Yinsheng in February 2007. The European company raised its holding to 49% in August 2008. Since then LVMH has bought a majority stake in rival baijiu producer Wenjun while Pernod Ricard became a joint venture partner with Jiannanchun via its acquisition of V&S.
China’s baijiu market continues to grow as consumers spend more on high-end liquors with distillers like Kweichow Moutai (600519.SH), Wuliangye Yibin (000858.SZ), Swellfun and Lu Zhou Lao Jiao (000568.SH) responsible for the bulk of sales. Profit margins can reach 70% at the premium end of the market. However, while foreign beverage players like Diageo and Pernod Ricard look for ways to capitalize on baijiiu, their priority for mainland China will remain whisky, vodka and cognac branding as sales in European and US markets still have some way to go to reach pre-financial crisis levels.