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Known as China’s ‘national spirit’, partial publicly traded, partial state-owned Kweichow Moutai manufactures the famed baijiu drink which some westerners have described as ‘drinking liquid razor blades’. The company Kweichow Moutai has seen its sales rise despite the falling consumer demand in China due to Covid-19 restrictions. In October, the publicly listed liquor maker became the most valuable company in China, overtaking tech giant Tencent, Alibaba and several others.
Moutai baijiu, made from fermented red sorghum, is a type of liquor that is clear and quite potent with 53% of alcohol content. The drink is also called ‘firewater’ for its fiery taste and is a staple drink at government events in China. It has also been called the ‘drink of diplomacy’ after it was offered to US President Richard Nixon during his trip to China in 1972.
US government archives also quote US Secretary of State Henry Kissinger saying, “I think if we drink enough Moutai, we can solve anything”, during a state dinner in 1974. More recently, President Xi Jinping offered the drink to former US President Barack Obama.
Considered a luxury status symbol in 2022, the origins of Moutai baijiu date back to the Qing dynasty.
Business model of Kweichow Moutai
Founded in 1999, the luxury liquor maker Kweichow Moutai operates through the following segments — procurement of raw materials, production, and sales. The limited supply of liquor is due to the unique manufacturing process in Maotai Town, located in Guizhou Province. The drink requires a particular climate and water sourced from the Chishui River for the high concentrations of micronutrients which give the liquor its unique, savoury taste.
A good batch of Kweichow Moutai takes nearly 4-5 years to make as it is stored with distillates in earthenware jars. The company previously said that it tried making the drink elsewhere in China away from Maotai Town but did not achieve the quality and taste as the original. It is not known whether this is true or just a marketing gimmick to drive up the value of Moutai baijiu.
Buyers of Kweichow Moutai Feitan (or Flying Fairy) swear by its strong aroma and taste, and the drink gets better with time. Some even buy bottles of the Moutai baijiu as an investment. The drink is among the most expensive liquor and generally retails for upwards of $100. In 2011, a rare bottle of Kweichow Moutai was sold for $1.55 m. The British auction house Christies lists several versions of China’s national liquor for collectors.
Kweichow Moutai is partially state-owned and partially publicly listed on the Shanghai Stock Exchange. The Moutai brand has been around for several years and has been the choice of the elite. Kweichow Moutai has a strong brand equity and has the biggest market share of the domestic baijiu market. The company has less than 50 different products which are priced in a range of $100 to $20,000 and different volumes and bottle sizes so that consumers can afford them at different price points.
Baijiu represents the cultural heritage of China, and Moutai’s endorsement by Mao Zedong, who served it at state events, has done most of the legwork for Kweichow Moutai. The production technique of the drink is a commercial secret, well protected by the Chinese government itself. Nearly 97% of Kweichow Moutai’s revenue comes from China alone, and it has yet to penetrate foreign markets. The company is already bigger than UK-based Diageo, which owns brands like Johnnie Walker, and Guinness, among others.
“Right now, with rising patriotism from pride in how China has so far contained Covid-19 and anger at the US from Trump’s trade war, Chinese are increasingly buying domestic brands and products out of patriotism,” Shaun Rein, founder of the China Market Research Group, told the BBC.
Over the past couple of decades, the production of Kweichow Moutai has increased significantly. Still, the rising demand has also helped competitors such as Wuliangye Yibin Co Ltd to thrive in the tight market.
For the nine months that ended September 2022, the company reported sales of 87.16 bn yuan (~$12.5 bn), up from 74.64 bn yuan. The company’s net income during this period rose to 44.40 bn yuan (~$6.4 bn) from 37.27 bn yuan. The gains despite Covid-19 are due to the preference for drinking baijiu at home, unlike other alcoholic drinks which are served in bars.
Domestic news media reported that most Chinese liquor brands had reported double-digit growth in the first three quarters of 2022.
Stock movement of Kweichow Moutai
Listed on the Shanghai Stock Exchange, the share price of Kweichow Moutai (600519.SS) is down over 17% over the past 12 months*. The company has a market capitalization of over $300 bn. However, the company has posted substantial gains compared to the share price before Covid-19.
The company’s stock has posted gains of nearly 30% compared to the share price on December 1, 2019.* The Shanghai Composite Index has posted gains of merely 5% during this time.
The stock has a PE ratio of 31.65, and a forward PE ratio of 33.00. The company’s price-to-book ratio stands at 9.93.
As of September 2022, the company had total assets of $39.63 bn, along with a large cash reserve. The company has an operating margin of more than 65% and has mostly been debt free while reporting consistent positive cash flows.
What’s next for China’s top liquor maker?
China’s focus on building a consumer economy is likely to boost Kweichow Moutai, and investor interest reflects in the recently released data that overseas buyers lapped up shares of the liquor maker in November through the Stock Connect programme. Overall, foreign investors bought Chinese shares worth $8.5 bn via the Stock Connect scheme, with a majority of this portion going into shares of the liquor company and Apple supplier Luxshare Precision Industry.
“The company will continue to target its core ultra-premium baijiu market. However, it also aims to strengthen its products across price ranges to cater for demand further down the income scale,” writes Alex Smith, Equity Investment Specialist at Abrdn. “For example, it recently launched a Rmb399 100ml Moutai, an innovative way to reach potential customers. Management plans to further optimise the brand portfolio to reach a wider market, including those in lower-tier cities.”
* as of December 5, 2022
