Consumer

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Bottoms up. China's biggest liquor maker is partying again, after recovering from the hangover of a nationwide anti-corruption campaign. Investors and analysts are anything but ready to put the bottle down.

Kweichow Moutai shares have surged 27 percent on the Shanghai Stock Exchange this year, compared with a 17 percent decline in the city's benchmark index. The stock has almost tripled from its January 2014 low, as revenue rebounds from a trough that followed the start of President Xi Jinping's war on graft.

The maker of baijiu, a fiery, sorghum-based liquor that's a staple of state banquets and official dinners, has reinvented itself as a hip drink for urban professionals, displacing the government buyers that were Moutai's traditional customer base. The company posted first-quarter comparable sales of 10 billion yuan ($1.5 billion), up 14 percent from a year earlier.

Thirst for Baijiu
After falling in the first half of the year, Kweichow Moutai sales have begun rising again
Source: Bloomberg

Moutai has a storied history. President Richard Nixon and Premier Zhou Enlai used the liquor to toast the opening of China to the U.S. during their landmark 1972 Beijing banquet. CBS anchor Dan Rather reportedly described it as tasting like “liquid razor blades.”

The company, based in the southwestern province of Guizhou, dominates China's baijiu industry, with a $53 billion market value that's almost three times that of its nearest competitor, Wuliangye. Moutai outperforms its rival on a range of measures, with a first-quarter operating margin of 79 percent compared with Wuliangye's 46 percent; return on equity of 25 percent versus 16 percent; and free cash flow of 15.3 billion yuan last year, against 6.3 billion yuan.

Moutai is benefiting from demand among private companies and individuals for an alternative to the single-malt whiskies that appeal to China's aspiring classes. Between 2012 and 2014, the company cut prices of its 53 percent-alcohol Feitian Moutai label to 850 yuan a bottle from 2,000 yuan, opening the high-end liquor to a swathe of new consumers. 

By last year, private consumption had started to dominate the baijiu market, with government spending dropping from about 50 percent of total sales to the "low single digits,'' according to Citigroup.

Off the Wagon
The government's share of baijiu consumption has shrunk since China's anti-corruption drive started
Sources: Citi Research estimates, China National Association for Liquor & Spirits.

Moutai's revival may also indicate China's anti-corruption fight is waning. For instance, the number of graft investigations opened into senior officials fell to 22 in March from a monthly peak of 50 two years earlier, Citigroup said in a report in March, citing the Communist Party's Central Commission for Discipline Inspection.

On a High
Shares of Kweichow Moutai have outperformed the Shanghai Composite Index in the past year
Source: Bloomberg

It's not all good news. Kweichow Moutai has shifted away from demanding cash on delivery, causing inventory to build up. It now takes more than two months for the company to collect payments, from 13 days in 2014, it said in March. Despite that, the company remains the favorite stock of investors buying through China's qualified foreign institutional investor program, ahead of SAIC Motor, the partner of Volkswagen and General Motors, and Yangtze Power, the publicly traded unit of the Three Gorges Dam hydroelectric-project operator, according to Credit Suisse. Of 26 analysts tracked by Bloomberg that cover the stock, 25 rate it a buy.

That's easy to understand. Kweichow Moutai is one of a limited number of plays on China's emerging consumer economy in a share market that remains dominated by old-economy industrial enterprises. Even after its recent surge, the stock is still cheaper than global competitors, at 20 times estimated earnings for this year, compared with 29 times for Jack Daniels maker Brown-Forman, or more than 60 times for India's United Spirits. Wuliangye trades at a forward P/E of 17 times.

Moutai's brand of baijiu has been around for more than a century, and buyers are betting the drink's popularity will endure through any short-term ups and downs. The stock has returned more than 4,000 percent, including dividends, since it started trading in 2001. That's enough to put fire into any investor's belly.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net