Caixin
May 15, 2017 07:30 PM
BUSINESS & TECH

Moutai Investors Ride Roller Coaster With Baijiu Maker

China’s 106-proof baijiu Feitian Moutai was once the toast of the town for ritzy government banquets and diplomatic dinners.

Officialdom’s intimate relationship with Feitian and its distiller Kweichow Moutai Co. Ltd. ended in late 2012 when the Communist Party’s newly appointed General Secretary Xi Jinping launched a sweeping anti-graft campaign.

The campaign, which continues today under now-President Xi, put the brakes on extravagant government functions in which Feitian and other brands of Moutai liquor were frequently served.

Having stepped back from politics, Moutai now promotes Feitian as a tipple of choice for business occasions and special gatherings of the nation’s growing middle-class.

The formula has succeeded, as underscored by the Shanghai-listed company’s soaring market value. Moutai’s market capitalization hit $71.5 billion in April, making it the world’s most valuable liquor brand ahead of former No. 1 Diageo, a British company whose labels include Johnnie Walker whisky and Smirnoff vodka.

But the baijiu distiller’s road to success since the start of the anti-corruption campaign has been fraught with challenges.

A recent spike in per-bottle prices, for example, fueled friction between company executives and retailers.

Moutai General Manager Li Baofang in April lashed out at retailers, blaming them for a jump in Feitian’s price to as much as 1,300 yuan per bottle, from 800 yuan over the previous six months.

“Whoever causes chaos in the market is smashing their own rice bowl,” Li declared at a meeting attended by representatives from Moutai’s retail partners. “Whoever fails to heed our warnings will be severely punished.”

And stock market watchers are divided over whether Moutai’s climbing share price accurately reflects company value or a wave of speculative investing.

Some experts wonder whether Moutai’s stock is now merely on the high tracks of an ongoing roller-coaster ride.

Alcoholic beverage companies in China have been a magnet for speculative stock traders, especially Hong Kong investors. Companies that make wine and hard liquor have been especially attractive in recent years.

Moutai’s domestic investors abandoned the stock after government banqueting began winding down, with Moutai’s share price falling 61% between the start of the anti-graft campaign and the end of 2013.

More recently, Yang said, small- and mid-sized funds have been selling the stock.

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But Chinese retail and foreign investors have been snapping it up. The number of Moutai shareholders grew to about 68,000 in early 2017 from 38,000 a year earlier, popular stock market blogger and investor Yang Tao told Caixin.

Meanwhile the company’s 10 largest shareholders “have not changed much in terms of the number of shares held,” he said.

Successful Overhaul

After Moutai liquor prices plunged in late 2012 – falling to 850 yuan a bottle from a peak of around 2,000 yuan – the company revamped its sales structure. A new, 600-strong team of marketing experts started inviting private enterprises catering to middle-class consumers to become authorized Moutai retailers.

Moutai’s next step was to launch online sales through internet platforms such as Tmall, which it did in November 2013.

Six months later, the company announced special discounts for new retailers as part of a sales network expansion. Scores signed up, and today Moutai’s network includes more than 2,400 domestic and 94 overseas retailers.

Stock prices recovered slowly after the 2013 slump. In late 2014, retailers in Jiangxi province, Yunnan province and Shanghai were selling the baijiu for 815 per bottle, four yuan less than the distiller’s wholesale price.

But prices for Feitian and other Moutai brands started climbing early last year thanks to strong consumer demand.

“Moutai’s 2016 sales volume was 5.5 times that of 2001,” said Moutai Chairman Yuan Renguo.

Bottles of limited edition spirits sold particularly well, climbing nearly 92% last year from the 2015 level to 2.12 billion yuan, according to the company’s annual report. Total revenues rose 18.9% year-on-year to 38.9 billion yuan in 2016.

Prices are expected to continue to rise over the next few years alongside strong demand. A China Merchants Securities report said demand may strengthen over the next three years, and Moutai prices could hit record highs in 2018 and 2019.

Although Moutai said it expects to sell 26,000 tons of spirits in 2017, up 15% from 2016, China Merchants predicted this year’s sales could reach 30,800 tons.

Moutai’s stock price is also climbing, having increased more than 300% since the dark days of 2013. Each share was worth more than 400 yuan in late April.

While rising stock prices have cheered Moutai shareholders, Feitian’s recent per-bottle cost increases have soured the mood among company executives.

Since late last year, Feitian’s retail price has climbed to as much as 1,300 yuan per bottle from 800 yuan, even though Moutai said it did not change wholesale prices.

Moutai officials pointed a finger at 66 retailers, claiming prices rose because those companies violated the distiller’s rules, which set regional boundaries for retail outlets and bar them from selling bottles to online platforms for re-sale.

Although retailers denied the charges and blamed supply-chain bottlenecks for price hikes, Moutai asked each retailer to promise in writing not to raise prices without the distiller’s approval. It’s not clear how many obeyed.

The company has also moved to control pricing for its limited edition spirits. In April, for example, it set a retail price of 1,599 yuan per bottle for a special edition baijiu commemorating the current Year of the Rooster.

In another move, a retailer who attended the April meeting but who asked not to be named told Caixin that Moutai had in recent months delayed filling large orders for a special baijiu that’s been aged for 15 years.

Collectors have driven up prices for these and other special stocks of spirits, which the company started selling in 2014.

Bottles of Year of the Horse and Year of the Ram baijiu now fetch more than 2,000 yuan apiece, a person close to the company told Caixin. The company’s rarest liquor can cost more than 20,000 yuan per bottle.

Any effort to step up production to meet rising demand would be problematic for Moutai, since a batch of Feitian must be aged for at least five years.

Beijing Pijitai Investment Co. CEO Dong Baozhen, who holds a significant amount of Moutai stock, said he learned by visiting Moutai production facilities that the company struggles to meet demand even though its staffers work overtime.

In the years since the anti-graft campaign slowed banquet sales, foreign investors have gotten behind the company.

“Pessimism dominated the market” in 2013, a fund manager told Caixin, because Moutai was pegged as “a bellwether for corruption.” The company says government-related consumption of its baijiu as percentage of total revenue fell to 1% last year from 30% four years ago.

But while some domestic investors were selling the stock in 2013, Yang said, overseas and Hong Kong-based institutional investors were taking up the torch. As a result, he said, Chinese funds today hold only about 30% as many shares as they did in 2007, and foreign funds are strong supporters.

Guangfa Jufeng Equity Fund became one of Moutai’s 10 largest stakeholders in the fourth quarter of 2012, boosting its holdings to 8.7 million shares from 1.07 million before selling most of those shares in the third quarter of 2013.

But during that rough period, Dong said, “investment funds in Singapore, Canada, the United States and dozens of other countries actively researched Moutai and quickly bought and built up shares in the company.”

And in the years since the Shanghai-Hong Kong Stock Connect program launched in 2014, global investors have found it easier than ever to trade Moutai shares. Thus, Moutai’s share value could very well continue to rise.

Meanwhile, though, company chief Yuan is adamant about holding down customer prices. A return to the pre-2013 high of more than 2,000 yuan a bottle of Feitian is “unthinkable,” he said.

At the April meeting, Yuan vowed zero tolerance for retailers who “maliciously raise prices.”


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