Chinese authorities' crackdown on 'gift giving' will create further pain for wine and spirits companies prominent in the world's second largest economy, analysts say.
Shares in Chinese white spirits companies have been hammered in recent months, after a crackdown on extravagant banquets for senior military officers at the end of last year first put pressure on the sector. Shares in white spirits company Kweichou Moutai, a well-known Chinese brand, have plummeted 27 percent over the past six months, while the shares of rival Jiugui Liquor have almost halved in value over the same period.
On Thursday, China's State Administration of Radio, Film and Television (SARFT) moved to ban advertising which encourages giving luxury gifts to authorities, raising concerns that further pain for the sector and other areas of the luxury goods market is imminent. Offering presents to authorities in an attempt to curry favor is a popular custom in China, and one that advertisers have capitalized on in their commercials, analysts say.
Aaron Fischer, analyst at research agency CLSA, said investors should not underestimate the impact the crackdown on gift giving will have on the global luxury goods market.
"If there is a slowdown in China sales there will of course be a negative impact on the global figure. Around 5 percent of the global luxury goods market is related to gift giving in China and only part of this would be impacted from a clampdown," he said.
CLSA expects substantially slower growth for the Chinese luxury goods market, which it expects to grow about 10-15 percent in 2013, a similar level of growth in 2012 but down sharply from around 50 percent in 2011.
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"There are certain sectors of the luxury market that benefit from gift giving, such as wine and spirits, while in contrast apparel is not too exposed. This is because people are more likely to buy a bottle of red wine or champagne as a gift rather than a handbag which is more subject to personal taste," said Fischer.
Watches and jewelry are also expected to be harmed by the clampdown on gift giving. CLSA forecasts that approximately 1 percent will be shaved off sales of high-end watches and jewelry as a direct result of the move. Shares in watchmakers Swatch and Compagnie Financiere Richemont fell around 2.5 percent in Europe on Thursday in reaction to the announcement from China's SARFT.
"Investors should be concerned. However, it is important to remember the large global luxury goods makers still have huge growth in other regions of the world and Chinese demand will still remain resilient on the back of China's expanding middle class," added Fischer.
Barclays China Economist Jian Chang said clients have been raising concerns over the impact on luxury stocks ever since China first hinted at its crackdown on corruption.
"We have expected a slowdown in the Chinese luxury market to normalized levels, due to this anti-corruption drive. Luxury watches, gold jewelry and the liquor companies appear to be most heavily impacted," she said.