Consumer

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Public holidays are a great time for drinking, and China's Golden Week holiday which ended last Friday is no exception.

Baijiu, the country's home-grown firewater, accounts for more than a third of all spirits volumes drunk globally and more than a quarter of sales value. And while it's gone through a tough few years in the wake of President Xi Jinping's anti-corruption crackdown, China's hard liquor market appears to be turning a corner.

Big in China
Baijiu is the most-consumed spirit in the world, and the highest-value market by turnover
Source: IWSR via Becle SAB

LVMH, maker of Moet & Chandon and the Wenjun baijiu brand, on Monday reported "improved momentum" in its Chinese wines and spirits business. Demand from baijiu producers increased for four consecutive quarters through June and looks set to keep rising, China New Borun, a distiller of drinking alcohol, told an investor call in August.

As Gadfly's Nisha Gopalan wrote in June, shares in China's biggest and most storied baijiu brand, Kweichow Moutai, have been on a tear this year. Inventory days at Silver Base, a Hong Kong-listed distributor of high-end liquor labels such as Moutai, fell to 259 in March -- their lowest level since 2012, suggesting that demand is finally catching up with supply.

The East Is In the Black
Chinese baijiu-makers are among the world's biggest liquor companies by trailing 12-month net income
Source: Bloomberg

There's much to like about baijiu right now. Back in 2012, about half the market consisted of high-end sales to government and business buyers, whose toasts to seal deals gave the liquor a funky odor of corruption that hit consumption during Xi's crackdown. Now more than 90 percent goes to retail customers, according to China New Borun. The high-end stuff is still a mainstay of wedding banquets, while cheaper varieties serve as an everyday drink.

Baijiu-makers' lack of geographic or product diversity helps explain their cheaper valuations relative to Western liquor companies. But the degree of disparity suggest that some distillers are not so much discounted as remaindered to the bargain bin.

Cheap Alcohol
Chinese baijiu-makers are mostly priced at a discount to Western distillers, based on blended forward 12-month price-earnings multiples
Source: Bloomberg

Western producers such as Diageo are trying to ape tequila's penetration of the global bar scene and bartenders are mixing baijiu with mangosteen and agave to appeal to cocktail drinkers, but that's probably not the best route to profits. Given baijiu's challenging flavor for foreign palates, there's more to be gained from consolidating its fragmented mid- and low-end domestic market than trying to make it the next global hit beverage.

Gan Bei
Corruption crackdown be damned. China's monthly retail beverage sales haven't stopped growing
Source: National Bureau of Statistics of China
Note: Shows figures for month ending Jan. 1, March 1, etc. No figures available for month ending Feb. 1 due to Lunar New Year.

Kweichow Moutai and Luzhou Laojiao, two of the most exclusive labels, are valued at about 20 times blended forward 12-month earnings estimates or more, so aren't the cheapest options. Other distillers look more attractive.

Some 59 percent of Jiangsu Yanghe's sales in 2015 came from its home province, Yuanta Research analyst Juliette Lu wrote in a June 30 note to clients, giving the mid-range brand significant scope to expand elsewhere in the country.

Looking just below the top of the range is also a decent idea. While wholesale prices of Moutai have recovered about 1.8 percent from their lows last year to 840 yuan ($125) a bottle and upward, according to SWS Research, those of Wuliangye, the second-most prized major label, have gained about 10 percent since March to 640 yuan.

Baijiu wasn't buried by China's anti-corruption crackdown. Out of sight since then, the business has quietly been developing, and maturing. It's high time it was uncorked.

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

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

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