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China's 'state liquor' Moutai defies downturn with spirited growth

Sales and profit rise despite coronavirus, but governance risks remain

Kweichow Moutai, a distiller of "baiju," a sorghum-based liquor, has bucked the sharp downturn in China's alcoholic drinks industry, partly due to its image as the "state liquor."   © Reuters

TOKYO -- The coronavirus has paralyzed the Chinese economy and cut down on socializing and drinking at restaurants and bars. But one of the country's most famous spirt brands has made merry regardless.

Kweichow Moutai, a state-owned distiller from the underdeveloped southwestern province of Guizhou that makes the sorghum-based hard liquor baijiu, bucked the downtrend with a 13% year-on-year rise in sales for the January to March quarter. Its net profit climbed 17% to 13.09 billion yuan ($1.85 billion).

The latest figures continue the Shanghai-listed company's stellar growth. Kweichow Moutai's shares have risen 8% this year, compared with a decline of the same amount for the Shanghai Composite index. Despite governance concerns, Kweichow Moutai has become one of the most valuable companies in the global spirits industry, with a market capitalization of 1.6 trillion yuan, or $ 227 billion -- far surpassing better-known competitors like Diageo, at $79 billion.

The scale of its success is all the more apparent when compared with some of its Chinese peers. Rival baijiu maker Sichuan Swellfun, more familiar to Chinese consumers by its brand name, Shuijingfang, saw sales drop 22% and net profit fall 13% from the same period last year. Swellfun's operating cashflow shrank 67%, while Moutai's jumped 94% to 2.3 billion yuan.

Other Chinese drink makers also had a devastating first quarter. Zhejiang Guyuelongshan Shaoxing Wine, which makes huangjiu, a pale yellow rice wine, said Monday that its sales had fallen 42%. And its peer Shanghai Jinfeng Wine lamented that the pandemic had "basically brought social dining to a halt," as it was dragged to a net loss in the first quarter.

It was a similar story for the country's top two brewers, China Resources Beer and Tsingtao Brewery, where turnover during the first two months of the year has dropped more than 20%. The country's total beer production in the first three months slid 33.8% to 5.495 million kiloliters.

What makes Moutai different has a lot to do with its brand image as the "state liquor." It has long been served at state banquets, including one hosted by Premier Zhou Enlai at the Great Hall of the People in Beijing to entertain President Richard Nixon during his surprise visit in 1972.

Later, bottles of the spirit became prized gifts and a target for speculators. It suffered at the height of the anti-corruption campaign by President Xi Jinping -- a testament to its role at extravagant dinner tables and as a pricey gift.

Moutai was served at a famous 1972 banquet when Chinese Premier Zhou Enlai hosted U.S. President Richard Nixon. (Photo by John Dominis/The LIFE Picture Collection via Getty Images)

"KCMT [Moutai] benefitted from its brand, which enjoys widespread recognition in China," said Kevin Sun of CCB International Securities, after the company's quarterly earnings announcement on Monday. "As its competitors struggle, we expect [Moutai] to maintain momentum throughout the remainder [of 2020], a year fraught with uncertainty," he added.

The analyst at the Hong Kong-based unit of China Construction Bank maintained the stock's outperform rating, raising its target price to 1,381.30 yuan from 1,207.00 yuan. Moutai shares closed at 1,279.13 yuan on Tuesday.

Mark Yuan, an equity analyst at Jefferies Hong Kong, maintained a buy rating with a target price of 1,480 yuan. "We expect there is little impact from COVID-19 on its growth, given the underlying demand growth is much higher than its supply growth," he said. Reflecting the general market view, he expects "resilient growth to continue in the rest of the year."

Anson Chan at Daiwa Capital Markets in Hong Kong, however, has doubts, pointing to a fall in customer deposits on its balance sheet to 6.9 billion yuan as of the end of March, almost 40% lower than a year ago. "We see risk in Moutai's revenue growth in the near term, due to order book weakness, as indicated in the decline in customer deposits," she said, keeping a hold rating on the company's shares.

What could be more worrying, especially for non-Chinese investors, is its governance structure. The company's controlling shareholder is Kweichow Moutai Group, which owns 58% of its shares. The parent, in turn, is 100% owned by the Guizhou Provincial Government, which is controlled by the Communist Party.

Early in March, the company's board said it had received a recommendation to appoint Gao Weidong as its new chairman, in accordance with the provincial government's directive. The 47 year-old Gao is a party member and a technocrat who rose through the local bureaucracy. He has no experience in the company or the distillery business. He was most recently the head of the province's transportation department but has taken the helm of both the parent company and the listed unit.

Back in December, Kweichow Moutai Group suddenly transferred 4% of Kweichow Moutai's shares to the Guizhou government free of charge. Applying the share price then, the transaction would have been worth about 60 billion yuan.

The move, according to the listed company's filing, was based on a "claim made through relevant notice" from the financially troubled provincial government.

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