Liquor king Kweichow Moutai says goodbye to era of easy money

January 03, 2020 17:08
Kweichow Moutai is forecasting a mere 10 percent sales growth for 2020 amid China’s slowing economic growth and the clampdown on speculative demand. Photo: CNSA

Kweichow Moutai (600519.CN), China’s top liquor brand, saw its share price tumble 4.5 percent on the first trading day of the new year, despite a strong overall market, after the company said its revenue and earnings were expected to be up about 15 percent for 2019.

While 15 percent may not seem bad at all, Moutai investors were disappointed as they have been used to seeing much higher growth rates.

Between 2015 and 2018, Moutai’s revenue soared over 130 percent while its net profit expanded 127 percent.

In the first half of 2019, revenue and net profit continued to grow at a pace of 17 percent and 27 percent respectively. The 15 percent full-year profit gain implies a much lower growth clip in the second half.

As Moutai currently has a market value of 1.4 trillion yuan (US$200.8 billion), investors are paying 40 times earnings for its shares. If its growth prospects dim, such a high valuation could be called into question.

In the past, Moutai has been making a lot of easy money. Riding on strong demand from official receptions and rising consumption power, Moutai, which has a limited annual production volume, has always sold out.

The favorable demand allows the company to keep raising its prices, sometimes a number of times a year, thereby fattening margins.

In addition to the actual demand, plenty of speculators are buying Moutai and reselling their supplies for a quick buck – or holding them as “long-term investment”.

But since last year, things have been changing.

On top of barring officials from throwing lavish banquets, where Moutai is a must-have, the government also started cracking down on Moutai speculating activities.

The most popular Moutai 53, officially priced at 1,499 yuan per bottle, changed hands at over 3,000 yuan each at one point on one e-commerce site.

After the introduction of the real-name registration system, one is allowed to buy a maximum of two bottles with their ID card. Reselling of Moutai at a stiff markup on online platforms like Taobao is also prohibited.

Since then, Moutai’s secondary price has dropped back to around 1,800 yuan per bottle.

Amid China’s slowing economic growth and the clampdown on speculative demand, the liquor maker is forecasting a 10 percent sales growth for 2020.

Meanwhile, Moutai share prices have surged over six times in the past five years and almost doubled last year alone. It’s now the fourth most valuable listed company in China, behind ICBC (01398.HK, 360011.CN), China Construction Bank (00939.HK, 601939.CN) and Ping An Insurance (02318.HK, 601318.CN).

If Moutai’s high growth era is over, investors may have to take a fresh look at the company and determine for themselves whether the high valuation premium is still justified.

This article appeared in the Hong Kong Economic Journal on Jan 3

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist