Not many alcoholic beverages have the pedigree of Kweichow Moutai’s clear Chinese liquor baijiu. About 5,000 years old, it was popularised in the Qing Dynasty. Mao Zedong favoured the pricey elixir (wholesale Rmb1,100, or $160, per bottle) which then appeared at every state banquet, and later dinners hosted by companies wishing to impress government officials. All that changed with the edict from Xi Jinping, China’s president, to curtail lavish spending in 2012. Out went luxury gifts; down went Shanghai-listed Moutai’s share price.
As its bottles promptly disappeared from certain dinner tables, Moutai’s market value (currently larger than Diageo’s) halved by February 2014. Then, a funny thing happened to its sales: not much. While revenues stopped surging at double-digit rates, they did not fall in value terms. This happened despite a sharp drop in the retail price. By 2015, the average selling price from distributors, according to Morningstar, had fallen to the ex-factory price for this company’s premium product. Distributors absorbed the pain, not Moutai.
As a result, Moutai’s operating profit margins hardly budged. They stood at a heady 60 per cent last September, about double that of local peers Wuliangye Yibin and Luzhou Laojiao. Some makers cut their own factory gate price. Moutai did not, though clearly it offered a bit of help to its distributors. Receivables soared in 2014 and 2015 as Moutai offered credit to its customers. Moutai also managed to pay its own suppliers later, preserving its operating cash flow. That is why its shares trade at 23 times earnings, above that of Pernod Ricard but cheaper than international peer Rémy Cointreau. And only Diageo beats Moutai’s projected return on equity of 26 per cent.