Kweichow Moutai Co. (600519.CN), China’s biggest and most valuable liquor maker, has seen its share price more than double over the last 12 months, thanks to the ever-rising price of its main product — Maotai.
Like the share price, the market price of the Maotai Chinese liquor has more than doubled. In these times when people try to get their hands on the latest iPhone model so that they can resell and make a quick buck, Maotai could, in fact, be a better bet for such speculators.
Kweichow Moutai currently has a market capitalization of 816 billion yuan. That equals the combined market cap of Hong Kong’s three largest property conglomerates — Cheung Kong Property holdings (00001.HK), Sun Hung Kai property (00016.HK) and Wharf (Holdings) (00004.HK).
While shares look expensive, earnings have actually been very strong as well.
The company said its revenue jumped 59.4 percent to 42.45 billion yuan in the first nine months of 2017 compared to the same period a year ago, and that net profit soared 60.3 percent to 19.98 billion yuan. The signature Maotai liquir contributed over 90 percent or 38.4 billion yuan of sales in the period.
Kweichow Moutai has strong brand loyalty, which acts as a good moat against competitors.
The liquor maker has hiked product price by nearly 20 percent in the period, but the steep price increase did not affect sales, demonstrating its strong pricing power.
Maotai has a long history. It’s said that it originated in the Western Han Dynasty or 135 BC, when the Han ambassador Tang Meng brought a liquor as present to emperor Wu after a visit to Yelang, now Guizhou. The emperor was so impressed by the taste of the liquor.
Like traditional Chinese baijiu, Maotai is distilled from fermented sorghum, wheat, and water. But what’s special about Maotai is that Kweichow Moutai is the only company that has the right to make it.
In other words, only Kewichow Moutai, which uses local ingredients and mountain waters in the town of Maotai, can call the liquor Maotai.
Authorities explain that Maotai town has the perfect geographical location, temperature, humidity and annual rainfall for making the best liquor.
Moreover, Maotai is rather complicated to make. Production cycle only starts around Chung Yeung Festival in October. And the whole production process takes at least five years.
As a result, Maotai has very limited supply each year. Regarded as a prestigious drink, Maotai has been used on official occasions in feasts with foreign heads of state and distinguished guests visiting China.
As Chinese get richer, demand for Maotai has become stronger. But since supply is limited, prices have been shooting up constantly.
For instance, the company’s flagship product, Feitian, with 53 percent alcohol, is sold at over 2,000 yuan per bottle in the secondary market, while in the primary market authorities have capped the price at 1,299 yuan.
Tight supply has supported a rampant fake market of Maotai. According to a study in 2009, Kweichow Maotai had an annual output of 20,000 tons that year, while the nation’s total Maotai sales reached 200,000 tons. It goes without saying that 90 percent of Maotai circulating in the market is counterfeit.
This article appeared in the Hong Kong Economic Journal on Oct 30
Translation by Julie Zhu
[Chinese version 中文版]
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