Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

Turns out the Chinese government might not be the worst financial adviser.

In another bold intervention in public markets, state media said shares of the nation's biggest liquor maker were rising too fast to be sustainable and warned investors last week to cork the bottle. Kweichow Moutai Co.'s stock had its biggest decline in more than two years, and continues to fall.

The Shanghai Stock Exchange piled on late Monday. In its criticism of a report published by Essence Securities Co., which sees Moutai's market cap doubling by 2025, the exchange said the Chinese brokerage did not fully disclose operating risks at the spirit maker.

Government meddling in the stock market is unwelcome. But that doesn't mean Xinhua News Agency's warnings were unfounded. 

Shares of the liquor maker have zoomed 101 percent so far this year, compared with a 10 percent rise in the Shanghai Stock Exchange A Share Index.

Drink Up
Shares of China's largest liquor maker have more than doubled this year
Source: Bloomberg

Any way you slice the valuation metrics, Moutai is expensive: It's trading at 28.2 times forward earnings, roughly one-third higher than its five-year historical average and a 23 percent premium to peers. On enterprise value to Ebitda, it's trading at a multiple of 18.5, a 10 percent premium to peers. All but two of the 28 analysts covering the stock and tracked by Bloomberg rate Moutai a "buy," with 11 analysts upgrading their price targets over the past month. Goldman Sachs Group Inc., which issued an extremely bullish report a day before the Xinhua article, has raised its price estimate on the company 11 times.

High Expectations
Goldman Sachs raised its price target on Moutai nearly a dozen times in the last year
Source: Bloomberg

Moutai's inventory of aging liquor,  a key ingredient in the production process, could run out faster than analysts expected, according to Alliance Bernstein research that recently called out holes in Moutai's five-year plan to deliver a 6.4 percent compounded annual growth rate in production capacity through 2020. 

Running Dry
Moutai's liquor inventory growth is slowing, which means price increases are probably on the way
Source: Company, Bernstein analysis and estimates
Note: 2018 to 2020 is an estimate based on 4 percent volume growth.

Almost half the promised volume has already been delivered, which means the company might face a shortfall in liquor supply, according to Bernstein, explaining that Moutai has "effectively borrowed from the future in order to deliver a short-term 2017 result."

If Moutai can't make more of the stuff, the only way to deliver earnings growth will be to increase prices. A 500-ml bottle of Moutai on the Guizhou Liquor Exchange already costs 1,495.60 yuan ($225), compared with 1,047 yuan a year ago, and further price increases are likely to be unpalatable to a Chinese government still allergic to conspicuous consumption.

Jacking up the price might prompt drinkers to look elsewhere for their baijiu fix. In the past three months, more than a quarter of regular Moutai drinkers said they've consumed liquor from a competitor, Wuliangye Yibin Co., according to the Bernstein survey.

Topping it all off is Moutai's decision in October to try its hand at the asset-management business, which Gadfly's Shuli Ren notes is as good an indication as any that the distiller's success is going to its head.

So while market watchers are right to be dismayed by Beijing's heavy hand, just because they don't like the messenger doesn't mean the message is wrong.

-- With assistance from Shuli Ren

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

  1. Production of its signature Feitian Moutai begins every September with a new batch of raw materials that are fermented and distilled over 12 months to create a base liquor, according to Bernstein. The base liquor is then aged for four years until it becomes "mature liquor." Then that liquor is either blended with even older batches to create the Feitian finished product, or it's set aside to become a future stock of aging liquor.

To contact the author of this story:
Shelly Banjo in Hong Kong at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net