Consumer

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

Apparently Kweichow Moutai Co. didn't get the Communist Party memo.

With group profit expected to exceed 30 billion yuan ($4.5 billion) this year, the Guizhou-based liquor maker said it wants to set up a financial arm, deploying some of its $10 billion of cash to lending and asset management. According to General Manager Li Baofang, Moutai hopes the new unit will account for 15 percent of revenue by 2020.

This sort of business diversion looks like a direct snub to President Xi Jinping's efforts to reform state-owned enterprises. Earlier this year, the State-owned Assets Supervision and Administration Commission of the State Council said publicly traded government firms needed to boost dividend payouts to help attract foreign investors and spur deleveraging.

By any measure, Moutai is stingy. Of 72 listed non-financial companies with a market capitalization of more than $100 billion, Moutai is the most profitable. Yet its dividend payout ratio is only 51 percent, less than the 67 percent global average. As of June 30, Moutai had 108 billion yuan in cash, almost double its annual revenue. Surely that can't be all for asset management?

Stingy
Moutai is one of the world's most-profitable companies, but it has a very average dividend payout ratio
Source: Bloomberg
Note: Data include non-financial companies with a market value of more than $100 billion.

Another theme of Xi's SOE reform is smaller, leaner ships. With government firms being asked to divest non-core assets, you have to wonder how much experience a liquor maker has in equities and bonds.

It is fair to say that Moutai has outgrown its modest origins, which puts it in a precarious position. Sales came to 39 billion yuan last year, almost 20 percent of the Guizhou government's entire fiscal revenue in 2015, the latest data available.

From a stock market point of view, Moutai also looks too good to be true. Its Shanghai-traded shares are up 70 percent this year as investors bet on an industry unstopped by price growth. A 500ml bottle of Moutai changed hands on the Guizhou Liquor exchange for 1,415 yuan in August, up 20 percent from the start of 2017. Guizhou's own GDP per capita is less than 20,000 yuan, the lowest in China. Moutai is now so expensive it's become the preserve of big city yuppies.

Gan Bei
Kweichow Moutai shares are up 70 percent since January
Source: Bloomberg

According to Chinese financial magazine Yicai, regulators may become alarmed if bottles of Moutai start exceeding 1,500 yuan, and Guizhou authorities have tried to rein in the golden goose before. In 2013, Moutai was fined 247 million yuan for anti-competitive pricing behavior.

Through the Shanghai Hong Kong connect, international investors have been steadily buying Moutai, and now own about 15 percent of the stock. But when a distiller's success goes to its head and thoughts turn to asset management, it may be time to take away the punch bowl.

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

To contact the author of this story:
Shuli Ren in Hong Kong at sren38@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net