In depth: Volatile cocktail stirring up China’s baijiu market


The new top man at the world’s most valuable liquor company means business.

During a shareholder’s meeting last month, distiller Kweichow Moutai’s new chairman Ding Xiongjun pledged a series of long-term reforms to make the company the first Fortune Global 500 company based in Guizhou, one of China’s poorest provinces.

But the company’s ambitious targets come as the market faces slowing sales growth, increasing regulatory scrutiny of stocks seen as bloated with capital, and a potential industrywide consolidation.

The 47-year-old former director of the Guizhou Provincial Energy Bureau took over from his predecessor Gao Weidong, who was removed in August after just 18 months on the job, marking the latest shake-up after a series of graft scandals at the country’s leading producer of baijiu, a strong liquor considered to be China’s national drink. At the meeting, Ding pushed for reforms in corporate management and asset management, as well as in marketing and pricing, according to a WeChat post published by the distiller.

Moutai is far from the only baijiu-maker looking to adjust its business to the tougher market, which has seen the giant’s profit growth in the first half dwindle to just over 9%, the lowest in five years, excluding 2020 when the pandemic disrupted operations.

Rivals including Luzhou Laojiao and Shede Spirits have been cutting costs by laying off sales staff in order to meet growth targets, according to a distributor of another leading brand, Wuliangye Yibin.

Workers check the fermentation of baijiu at a brewery in the city of Xingyi in southwest China’s Guizhou Province on Feb. 20.

  © AP

Distillers are also starting to directly manage sales channels to bolster efficiency. Companies including Shede, Sichuan Swellfun and Sichuan Jiannanchun have been consolidating their scattered distributors into single companies that oversee sales in a particular region. Moutai has long been trying to strengthen management of existing sales channels to give it more control over prices.

Licenses to distribute Moutai are tightly controlled and had in the past been handed out by some senior managers in exchange for political and financial gain, such as in the case of former boss Yuan Renguo, who was sentenced to life in prison last month for illegally accepting cash and property worth 112.9 million yuan ($17.7 million).

“It is unscientific to deviate from the law of value. Moutai will follow the laws of the market, respond to market signals, and reflect its value reasonably,” Ding was quoted as saying at the meeting in a report by Sina Public Company Research Institute.

The chairman’s comments were seen as a signal that the company will be raising factory-gate prices including those for its signature Feitian Moutai, which has remained at 969 yuan per 500 ml for the past three and a half years and has a recommended — but not mandatory — resale ceiling of 1,499 yuan. Market prices are currently at around 3,000 yuan per bottle due to high demand and distributors’ aggressive hoarding.

Stock volatility sparks regulatory risk

Baijiu is a clear spirit made by fermenting sorghum or other grains such as barley, corn, rice and wheat. It is mostly consumed within China’s borders. The liquor comes at all price points, from gallon jugs costing a handful of yuan to prized Feitian Moutai, which is often served at state banquets and presented as a diplomatic gift.

The value of baijiu stocks meanwhile had been surging for the past four years, until recent volatility.

Kweichow Moutai’s stock crossed the 1,000 yuan mark on June 27, 2019, giving the distiller a 1.26 trillion yuan valuation at the time. The 19 baijiu-focused Chinese liquor producers listed on the mainland soared between 20% and 326% for the entire year of 2020, according to data compiled by Caixin.

The trend continued in the first half of this year, with the benchmark CSI Liquor Index surging as much as 5.7% and closing at a record high of 21,000 on Feb. 10, a day before the Lunar New Year holiday. However, the index tumbled following the festivities to a low of 14,108 before mounting a recovery through April and May.

The roller-coaster ride did not stop there.

Just as investors were getting comfortable, liquor stocks began a major retreat on June 7 — though not before the index set a record high of 21,438.35. It continued to slip throughout July and bottomed out at 14,314 after tumbling 7.7% on Aug. 20. Moutai shares sunk to 1,525 yuan, a significant drop from their Feb. 18 peak of 2,627.88 yuan, while rival Wuliangye fell 7.3% from the previous day, inflicting losses on fund managers and retail investors alike.

In fact, the sell-off on Aug. 20 was triggered by a symposium held that morning by the State Administration for Market Regulation, which noted the volatility and high valuations of baijiu stocks.

A source at a securities firm told Caixin that the event — attended by representatives from liquor companies and their investors and scheduled right before two national holidays when baijiu prices normally rise — sought to rein in both retail and stock prices, and sent a regulatory signal to control investor enthusiasm for distillers.

“The flood of capital into the liquor market has raised concerns from many parties,” the person said. “This round of regulatory control is aimed at cooling down the primary market [where companies are rushing to go public] by knocking down the prices of the secondary market [where companies’ shares are publicly traded]. Companies won’t be allowed to go public when the market is this overheated.”

A person at a mutual fund said measures such as restrictions on investment in the baijiu market and financing activities in related fields, as well as postponements of companies’ listings, could be possible.

A person in charge of a midsize distiller in Maotai — a Guizhou town famous for its baijiu, home to Kweichow Moutai and more than 1,700 other producers — told Caixin that recently the local government had banned sales staff of liquor companies from promoting investment opportunities on social media platforms, including Weibo, WeChat and Douyin.

In a notice published on Oct. 5, the China Banking and Insurance Regulatory Commission ordered banks to ramp up funding to coal miners and energy companies amid a power supply crunch, and explicitly warned against using business and consumer loans to invest in luxury consumer goods, including Moutai and expensive Pu’er tea, in order to prevent “the disorderly expansion of capital.”

At the end of the second quarter, managers had cut allocations to the liquor sector from 15.9% to 13.9% from the previous quarter, according to data compiled by Zhongtai Securities. Specifically, funds have cut their holdings of the top three baijiu stocks Kweichow Moutai, Wuliangye, and Luzhou Laojiao by 1.31, 0.54, and 0.52 percentage points, respectively, during the quarter, noted Snowball Finance, a finance information portal.

Sales propped up by price hikes

The concern over baijiu valuations, according to another mutual fund source, was connected to the slowing growth of major baijiu distillers, especially Moutai, as half-year earnings were weak even as stock prices soared.

Fellow first-tier distiller Wuliangye reported a 19.5% growth in revenue and a 21.6% growth in net profit in the first half of this year, compared with 26.7% and 31% growth, respectively, in the same period in 2019. Another top producer, Jiangsu Yanghe Brewery Joint-Stock, reported a 15.8% increase in revenue and a 4.8% increase in net profit in the first half, compared with 10% and 11.5% in the same period in 2019.

“The average price-to-earnings ratio had been at about 50 times company earnings, far exceeding the manufacturing industry average,” a person at a private equity fund said.

“Regardless of how popular sauce-fragrance baijiu may appear, total output of baijiu is declining every year,” the above Wuliangye distributor said, referring to the prestigious liquor class that Moutai belongs to.

A government crackdown in 2012 on officials’ luxury spending hit distillers hard, especially Moutai, which is often used in business gift-giving. Almost 70% of distillers were forced to halt or cut production between 2012 and 2017. Given baijiu’s production cycle — which runs to about five years for sauce-fragrance varieties — the effects of this sudden cut to demand on production are still being felt.

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