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China’s famous spirt brand Moutai defies downturn with rousing production

The coronavirus has crippled the Chinese economy and reduced socialising and drinking at bars and restaurants. But one of the most popular spirit brands in the country has turned merry regardless.

The state-owned distiller, Kweichow Moutai, hailing from the underdeveloped southwestern province of Guizhou that produces the sorghum-based hard liquor baijiu, defied the downtrend with a 13 per cent year-on-year increase in sales for the January to March quarter. Its net profit rose by 17 per cent to 13.09 billion yuan (USD 1.85 billion).

The new statistics continue the stellar growth of the Shanghai-listed company. Kweichow Moutai’s shares this year have risen by 8 per cent compared to a fall of the same amount for the Shanghai Composite index. Facing concerns about governance, Kweichow Moutai has become one of the most profitable firms in the global spirits industry, with a market capitalisation of 1.6 trillion yuan, or USD 227 billion, far exceeding better-known rivals like Diageo at USD 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 beverage producers had a disastrous first quarter as well. Zhejiang Guyuelongshan Shaoxing Wine, who produce a pale yellow rice wine called huangjiu, said Monday that its sales had fallen by 42 per cent. And its peer, Shanghai Jinfeng Wine, insisted that the pandemic had “basically brought social dining to a halt,” as the first quarter was dragged to a net loss.

It was a similar story for the top two brewers in the country, China Resources Beer and Tsingtao Brewery, where revenue has fallen by more than 20 per cent during the first two months of the year. Overall beer production in the country fell 33.8 per cent to 5.495 million kiloliters in the first three months.

It was a similar story for the top two brewers in the country, China Resources Beer and Tsingtao Brewery, where revenue has fallen by more than 20 per cent during the first two months of the year. Overall beer production in the country fell 33.8 per cent to 5.495 million kiloliters in the first three months.

Later, bottles of the spirit became coveted gifts and a target for speculators. It suffered at the height of President Xi Jinping’s anti-corruption movement, a testament to its position at lavish dinner tables and as an expensive gift.

“KCMT [Moutai] benefited from its brand, which relishes in widespread recognition across China,” said Kevin Sun of CCB International Securities after the company announced Monday’s quarterly earnings. “As its rivals fail, we expect [Moutai] to keep the momentum running throughout the remainder [of 2020], a year loaded with uncertainty,” he said.

The analyst at China Construction Bank’s Hong Kong-based unit maintained the outperformance rating of the stock, raising its target price from 1,207.00 yuan to 1,381.30 yuan. Shares in Moutai closed Tuesday at 1.279.13 yuan.

Equity analyst at Jefferies Hong Kong, Mark Yuan, retained a buy rating with a target price of 1,480 yuan. “We expect that COVID-19 would have little effect on its production, considering the underlying growth in demand is much greater than its growth in supply,” he said. Reflecting the overall view of the market, he expects “resilient growth to continue through the rest of the year.”

Anson Chan at Daiwa Capital Markets in Hong Kong, however, has concerns pointing to a decrease in consumer deposits on its balance sheet to 6.9 billion yuan at the end of March, about 40 per cent lower than a year earlier. “We see uncertainty in the near-term growth of Moutai’s revenue due to order book pressure, as shown in the decline in customer deposits,” she said, keeping a hold rating on the company’s stock.

What may be more troubling is its governance system, particularly for non-Chinese investors. Kweichow Moutai Group, which holds 58 per cent of its shares, is the majority shareholder of the firm. The parent, in effect, is 100 per cent owned by the Communist Party-controlled Guizhou Provincial Government.

Early in March, the board of the company said it had received a recommendation to name Gao Weidong as its new chairman, following the guidance of the provincial government. Gao, 47, is a member of the party, and a technocrat who rose from the local bureaucracy. He has no in-company or distillery experience. Most recently he was the director of the transportation department in the province but took the reins of both the parent company and the entity listed.

Kweichow Moutai Group abruptly passed 4 per cent of Kweichow Moutai’s shares free-of-charge back in December to the Guizhou government. The transaction would then have valued around 60 billion yuan if the share price were applied.

According to the filing from the listed company, the was based on the financially troubled provincial government’s “claim made through relevant notice.”

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