Mao Zedong’s favourite spirits brand eclipses western icons

Wang Yihe is a big fan of Moutai, the fiery Chinese liquor whose high price and popularity among the nation’s political elite have helped propel its maker to the peak of the country’s stock market.

The Shanghai investment firm owner consumes about 200 bottles a year of the premium-grain alcohol and has invested almost a third of his total assets in Shanghai-listed distiller Kweichow Moutai.

“I am going to hold on to my Moutai stock for the next decade because there are tens of thousands of drinkers like me in China,” said Mr Wang.

Consumers and retail investors such as Mr Wang have made Kweichow Moutai the country’s most popular liquor maker and the world’s most valuable alcohol brewer, bigger than AB InBev, Diageo and Heineken put together.

Shares in Moutai, a proxy for high-end consumption in the country of 1.4bn people, have risen by almost half since early February when the pandemic prompted a sell-off in Chinese markets. That surge contrasts with a coronavirus-driven slump in the global alcohol industry as government containment efforts around the world led to the closure of bars and restaurants.

Line chart of Market cap ($bn) showing Chinese liquor group is now bigger than Disney and Coca-Cola

Moutai’s market capitalisation has soared by Rmb360bn this year to hit Rmb1.85tn ($260bn). A favourite of Mao Zedong, who used it to toast the People’s Republic, the brand has eclipsed stalwarts of western capitalism including Walt Disney, Coca-Cola and LVMH.

Though its sales grew at its slowest pace since 2015 in the first quarter, that bettered a fall in China’s overall liquor output. Demand for Moutai has held up both as an investment and a banquet staple, buoyed by Beijing’s efforts to stimulate the virus-stricken economy.

The company reported a 13 per cent increase in revenue to Rmb24.4bn in the first quarter of this year and a profit margin of 92 per cent. In contrast, sales at western peers including Diageo and Pernod Ricard fell.

But as its share price soars — the distiller on Monday surpassed ICBC to become China’s most valuable company — analysts are warning of building risks.

“Moutai’s stock has become a highly speculative investment,” said Zhang Zhigang, owner of Shenzhen-based Zhichangrong Investment Co, an asset manager. “It is overpriced and the bubble won’t last for good.”

In a market featuring cut-throat competition, Moutai enjoys a unique status thanks to its historical ties to the Communist leadership.

Dozens of Mao’s generals recalled in their memoirs using the liquor to clean their wounds during the Long March. Its reputation got a further boost in 1972 when Premier Zhou Enlai toasted Richard Nixon with Moutai at the state banquet for the US president ahead of the normalisation of relations between the countries.

Such endorsements made Moutai the brand of choice for the elite. Wang Ling, a Moutai distributor in Beijing, said the liquor was a must-have at business banquets because it represented “a display of power”.

“Drinking Moutai is one of the best ways to gain acceptance into the political establishment that has a final say on business deals,” Ms Wang added.

Column chart of Fine wine global market share (%)* showing Kweichow's Baijiu is the world's best selling liquor

The potent spirit, which retails for as much as Rmb2,600 a bottle, is also increasingly popular among China’s growing well-to-do households.

Luo Min, an alcohol seller in the eastern city of Hangzhou, said orders for wedding ceremonies had more than doubled over the past two years as the liquor became a showcase for financial success.

While demand for Moutai has surged, supply has struggled to keep up. The liquor maker reported a 29 per cent increase in output from 2014 to the end of last year. Over the same period, Bain estimated, the number of wealthy individuals in China — Moutai’s main consumers — more than doubled to more than 2m.

The distiller has blamed slow output growth on natural constraints, but analysts say the company is curbing production to keep prices high.

“Moutai wants to position itself as a luxury good that’s hard to get hold of,” said Cai Xuefei, an analyst at Sohu Alcohol, an industry portal.

Ms Wang said at least half of the liquor’s annual sales were typically snapped up by investors betting on even higher prices later. Retail prices have risen 10 per cent since Beijing relaxed lockdown measures in March, boosted by a government-led surge in credit.

“The prices of Moutai stock and liquor reinforce each other,” said Mr Wang, the Shanghai-based asset manager.

A state-backed construction boom has provided further lift. “You can’t win government contracts without drinking with officials and Moutai is their favourite,” said Ms Wang, the Beijing-based liquor distributor.

While more than 95 per cent of Moutai’s sales are from the domestic market, its stock has become a magnet for global investors looking to profit from China’s consumption recovery.

“This is the foreigners’ favourite,” said Andy Maynard, managing director at China Renaissance Securities, a brokerage in Hong Kong. “If you say to any client [or] asset manager globally that looks at China . . . ‘what’s your biggest core holding position?’, most of them will mention this stock.”

Foreigners are able to purchase Kweichow Moutai shares via the Hong Kong-Shanghai stock connect, a trading link between the two exchanges. In 2018 Moutai became a component of the MSCI Emerging Market indices, channelling more foreign money into the stock.

Mr Zhang of Zhichangrong Investment said Moutai’s scarcity and surging retail price — which has more than tripled over the past four years — was due primarily to hoarding by investors.

Line chart of Share price (Rmb) showing Kweichow Moutai's stock has surged in recent years

“In order for the music to carry on, you have to make sure output is under control and buyers keep coming in,” he said. If either pillar falls, “the market will collapse”.

There are also political risks to consider, with Moutai seen by some as a barometer for corruption. Rising demand for the liquor often used as a gift to curry political and business favours could imply a resurgence of graft.

Moutai’s retail prices almost halved and its shares sank by more than a third in 2013 under the weight of President Xi Jinping’s anti-graft campaign targeting lavish spending and gift-giving, before starting to recover in 2016.

The distiller’s delicate relationship with its distributors is another consideration. Moutai charges its licensed sellers Rmb969 a bottle, less than half the retail price. While retail prices have quadrupled in the past decade, Moutai’s factory gate prices have merely doubled.

The gap suggests the pricing strategy has primarily enriched the distiller’s well-connected distributors, through which 55 per cent of its sales are made.

“There has always been a lot of controversy around the ownership of distributors and vested interest in the distribution channel,” said Euan McLeish, an analyst at Bernstein in Hong Kong.

Barring increased output, analysts say future performance will depend on how much Moutai increases prices — which would come at the expense of distributors.

Li Baofang, then-president, said in December that the company would this year “significantly” increase direct sales, for which it charges Rmb1,499 a bottle.

But Ms Wang says distributors still have the upper hand. “We will boycott Moutai if it really annoys us,” the Beijing-based distributor said. “Moutai can’t do whatever it wants.”

Additional reporting by Wang Xueqiao in Shanghai and Xinning Liu in Beijing