Moutai Wins Wealthy Chinese Fans

Date: 04.Mar.2014         From: The Wall Street Journal

Kweichow Moutai Co.600519.SH +4.20%, the company known for its intoxicating brew of the same name, is getting a boost from a new group of consumers: private wealthy buyers.

Nicknamed “white lightning” for its translucent colour and swift kick, Moutai had long been a staple at Chinese government banquets. But a clampdown on luxury spending by officials as a way of curbing corruption has stamped out much of that demand for more than a year.

With demand hit, shares of the Shanghai-listed firm more than halved from a mid-2012 peak to a bottom in early 2013. But the stock is now up more than 20% so far this year, thanks to wealthier Chinese who are increasingly buying bottles for weddings and business banquets, says Stella Zhang, managing director at Singapore-based APS Asset Management, which began buying the stock at the end of last year.

“Moutai itself is not a corruption,” even though it has been associated with that, said Ms. Zhang.

The price of the firm’s flagship product—a 500 mL 53% alcohol by volume bottle—has been falling from a more than 2000 yuan a bottle high in 2011. But now that Chinese consumers who may not have been able to afford Moutai before are buying, prices seem to be stabilizing around 1100 yuan, says Ms. Zhang. Kweichow Moutai’s stock has long been a favourite pick for APS, which first invested in 2004. The firm watched its investment surge by ten-fold before selling off “in a major way” around the luxury curbs in late 2012.

Business for Kweichow Moutai, which produces over 70 different beverages and spirits, looks promising. Revenue rose in the second and third quarters of 2013, in part because the firm increased selling of its products through new distributors and e-commerce sites. Analysts estimate Kweichow made 30 billion yuan in revenue in 2013, up more than 13% from the previous year.

Behind the rebound is Moutai’s sturdy reputation as one of China’s strongest luxury brands.

The sorghum-based drink takes years to ferment and has a respectable history. Party officials once used Moutai to toast foreign diplomats and other elite guests visiting China, and Chinese embassies have presented Moutai as gifts to foreign countries. The brand got a major boost in 1972, when then Premier Zhou En-lai entertained U.S. president Richard Nixon with the drink at a state banquet in Beijing.

Moutai’s stock trades around 10 times price-to-earnings, lower than 15 to 20 times for international liquor brands—another reason that now might be a good time to buy, says Ms. Zhang.

Still, she says her firm isn’t expecting the stock’s rebound this year to be “spectacular.” The stock is still 40% off from it’s all time high.  One bottle of Moutai’s flagship product—at almost one-third of a local’s average monthly salary—is still expensive enough to expect sales growth to “recover gradually” by relying on the mass market.

Other local liquor brands are faring worse. Shares of Wuliangye Yibin Co.000858.SZ +1.70% Ltd., another baijiu- or white spirits-maker, have inched up less than 2% so far this year on the Shenzhen stock market.

Unlike Wuliangye, Kweichow Moutai is known for limiting production, keeping its liquor distributors thirsty for more. “The firm has strong bargaining power… its distributors are extremely loyal,” says Earl Yen, fund manager of CSV China Opportunities, a $56.3 million fund that begin investing in the stock in January. “We think the bad news has been factored into the firm’s price and earnings already.”

The turn of fate for Moutai has been somewhat of a surprise.  Ms. Zhang says that her firm’s survey of liquor distributors shortly after the government clampdown came down to a dismal verdict: “They expected it to take at least two years to de-stock and for demand to recover… more than 50% of their clients were from government and army officials. They didn’t see any contribution from that group the rest of the year.”