GUANGZHOU -- When the coronavirus pandemic shut down bars and restaurants earlier this year, a Guangzhou woman surnamed Tan fell in love with crafting her own cocktails. The 31-year-old pours baijiu into a glass with grapes, dragon fruit and a lactic acid drink.
One of her brands of choice is Chongqing Jiangji Distillery's Jiangxiaobai, which, at 20 yuan -- less than $3 -- for a 100-milliliter bottle, is popular among younger drinkers. Many of China's 1,400-plus baijiu makers have expanded their lineups to shake the sorghum-based spirit's old-fashioned image and appeal to a broader audience.
But top player Kweichow Moutai has stuck consistently with a strategy centered on luxury products and scarcity. The company has been rewarded with a market valuation topping those of corporate titans such as Coca-Cola and Toyota Motor.
Most baijiu distillers reported declines in revenue, profit or both for the first quarter of 2020 amid a coronavirus-induced slump. Chinese retail sales of alcohol and tobacco sank 14% as eateries closed and companies held fewer parties.
Moutai's success stands out. Its revenue grew 13% on the year last quarter to 25.2 billion yuan ($3.55 billion), while net profit jumped 17% to 13 billion yuan. China's monetary easing has boosted the company's shares to record territory since April, as investors see the stock as a safe asset unlikely to lose much value, and Moutai has become the mainland's most valuable manufacturer.
The distiller has not capitalized on the drink-at-home trend as many of its peers have. A 500 ml bottle of its flagship Feitian brand, which generates 90% of Moutai's revenue, carries a list price of 1,499 yuan -- 15 times the price of Jiangxiaobai by volume.
Moutai, China's de facto "state liquor," is served at state banquets and is a typical gift for high-level bureaucrats. Demand plunged under the austerity campaign launched after President Xi Jinping took office in 2013. The company's revenue growth remained mired in the single digits through 2014 and 2015.
Its current rebound has been driven by consumers and retailers betting on a recovery in demand that will let them resell the liquor for a profit.
Feitian's value grows with time, much like a fine wine. Profits from resale can be significant, and "holding on to it can increase the value further," said an analyst at Zhongtai Securities.
A liquor store in Guangzhou had a few bottles of 2020 Feitian lined up on the counter, with no price tags. An employee said the store would sell for 2,700 yuan per bottle -- an 80% markup from the suggested retail price.
"We don't know what the price will be tomorrow," the staffer said. "We decide after checking the market, including what it sold for at other stores."
The going price of Feitian has risen by 100 yuan since before the Lunar New Year holiday. A 2018 bottle costs another 300 yuan on top of that, and few are on the market, according to the liquor store employee.
Moutai is the only baijiu maker whose products have an established resale market -- so much so that a local department store reportedly used Feitian as collateral for a bank loan. How has the brand become so valuable?
China's rapid economic growth in the 2000s brought a rise in demand for liquor. Baijiu makers such as Sichuan Province-based Wuliangye Yibin seized on this opportunity by rolling out new products with a wide range of alcohol content, flavors and price points.
Moutai went against the prevailing current, pouring its resources into the high-end Feitian brand and keeping quantities limited. The company kept retailers in line with restrictions on shipments to stores that sold its products too cheaply.
In 2018, Moutai commanded a domestic market share of over 40% based on profit, according to estimates compiled in part by Huatai Securities. Considering baijiu is made from sorghum and other grain, the cost of raw material is cheap, with operating margins topping 60%.
Though Moutai's domain faces no threat at present, the sustainability of growth has come into question.
One issue involves corruption allegations at the executive level. With Moutai's distribution licenses promising stable earnings for the holder, the licenses are seen as a source for bribery. Yuan Renguo, Moutai's former chairman, was arrested last year, accused of improperly handing out distributor licenses and accepting bribes.
The speculative resale market could leave a bad taste with consumers as well. The market values for Moutai baijiu were 20% higher than the wholesale prices in 2006, but the discrepancy expanded to 70% in 2018. Internal corporate reforms together with efforts to keep market prices in check appear crucial to shielding the valuable Moutai brand.
China's future monetary policy represents another cause for concern. If the People's Bank of China, the central bank, tightens the spigot on the money supply, the equity market may sober up and enter a correction mode.