China’s Liquor Giant Reveals Record Deliveries Without Cash

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Kweichow Moutai Facility
Workers package Kweichow Moutai Distillery Co. baijiu liquor at the company's facility in the Maotai section of the Renhuai District in Zunyi, China. Photographer: Nelson Ching/Bloomberg

China President Xi Jinping’s crackdown on corruption and extravagance has cut into demand for luxury goods throughout the economy. Now, the campaign is bruising the balance sheets of some of China’s biggest companies.

In the latest example, Kweichow Moutai Co., the $37.9 billion maker of a fiery liquor long used at political celebrations, has seen a spike in unpaid bills as distributors delay payments. Prices for Moutai have tumbled, cutting distributor profits and forcing them to buy on credit. Payments due to the company, what accountants call receivables, almost quadrupled at the end of September, the most recent quarter available.

As Kweichow Moutai prepares to report earnings next week, the results will illustrate the corporate fallout of Xi’s crackdown. The question is whether distributors will need to borrow more to keep buying, or whether they’ll start handing over cash. The distributors have typically used bank-guaranteed checks that defer payments for as long as six months.

“The retail price of Moutai has come down a fair bit,” said Yao Yue, an analyst at Morningstar Inc. “The distributors may not have as much cash flow as they used to.”

Moutai -- part of a family of white, sorghum-based spirits called baijiu -- earned its cachet as the alcohol of choice for Chinese leaders and diplomats. At its peak in 2012, about half of Moutai’s annual sales volume came from government or government-related consumers, according to a March report from Goldman Sachs Group Inc.

Back then, distributors could charge several times the wholesale price from Kweichow Moutai. A bottle of the company’s 106-proof Feitian Moutai could sell for as much as 2,200 yuan ($354), more than three times the roughly 700 yuan wholesale price at the time, said BNP Paribas SA analyst Charlie Chen.

Profit Squeezed

The easy profits are now gone. This month, some bottles of the liquor could be found for 798 yuan, below the current wholesale price of 819 yuan.

Payments are much slower too. In the past, baijiu makers would typically require distributors to pay months in advance, Yao of Morningstar said, getting cash before they handed over product. Now, some Moutai distributors do the opposite, taking the liquor in return for bank checks that give them months to produce cash.

Kweichow Moutai, which is scheduled to report 2014 earnings April 21, will probably post sales growth of 1 percent, according a median estimate of 16 analysts compiled by Bloomberg. That would be the slowest pace since at least 1998.

The stock fell 0.2 percent to close at 205.7 yuan, the most in almost a week. The benchmark Hang Seng Index rose 0.2 percent.

Accounts and notes receivable spiked to 1.16 billion yuan at the end of September last year, compared with 302 million yuan the quarter before. Moutai’s biggest competitor, Wuliangye Yibin Co., similarly saw receivables more than double to 9.2 billion yuan in the first quarter of last year before dropping to 7.5 billion yuan in the third quarter.

Buy Ratings

The Guizhou-based Moutai expects growth to continue to moderate from the pace of past years and plans to counter the slowdown by focusing on mass-market consumers, the company said in an e-mailed statement.

Even with delayed payments rising, analysts see nominal impact on Moutai’s earnings. The receivables, while at a record high, accounted for about 17 percent of the 6.8 billion yuan sales in the third quarter to September.

“These bank checks are an instrument with high credibility,” Morningstar’s Yao said. “You will definitely get the payment, but there will be a delay.”

Moutai has a “buy” recommendation from 22 analysts with only one giving a “hold” rating and none saying investors should sell, according to data compiled by Bloomberg.

“Moutai is a brand that is more than 200 years old,” BNP Paribas’ Chen said. “People still believe this is the best brand in the Chinese liquor industry.”

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