Kweichow Moutai is definitely a star performer in China’s domestic equity market.
However, some investors keep complaining about its high valuation. Moutai’s 30 times price earnings look expensive, but not really if one looks at the valuation from a business perspective.
One big advantage of Moutai is that it does not need to diversify. Very few firms are good at diversification.
Selling a wide range of products compounds the difficulties in procurement, logistics, sales and marketing.
Moutai pretty much derives most of its income from its core product — 53 percent alcohol Kweichow Moutai.
Also, Moutai is one of the very few companies that do not have to worry about the inventory issue.
Consumer goods such as mobile phones and cars lose value quickly. Manufacturers may have to slash prices deeply to clear excess stock. Dead stock would be costly.
But in Moutai’s case, its products actually appreciate in value year after year. Dealers are happy to keep stock as shortage happens from time to time.
Moutai also enjoys the extreme loyalty of its fans.
There are hundreds and thousands of red wine brands, and perhaps thousands of different beer products. But Chinese white liquor market is dominated by a few major players, among which Moutai is the leader.
There is greater possibility for drinkers to switch from other baijiu to Moutai rather than the other way round.
If we look at Moutai from an entrepreneur’s point of view, it’s not difficult to understand why it has been one of the best performers in the A-share market.
This article appeared in the Hong Kong Economic Journal on July 8
Translation by Julie Zhu
[Chinese version 中文版]
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