An investor could buy shares of Kweichow Moutai for RMB6.25 at the IPO in 2001. Their overall return on investment would be 27,584%, based on a share cost of RMB1,634.08 as at 9 September 2021 and including dividends received over time.

Kweichow Moutai, which is listed on the Shanghai Stock Exchange, is indirectly owned by the Guizhou province government. It is the largest liquor company in terms of market capitalization.

What is Kweichow Moutai?

Kweichow Moutai Feitian, the company’s flagship Moutai (or Flying Fairy), has a savoury smell that is very similar to soy sauces and fermented beans. The strong Moutai smell is noticeable in the air, and you’ll notice it when you get to the town.

A half-litre bottle Kweichow Moutai Feitian retails for US$350 Properly stored aged Moutai will be even more expensive. The most expensive Chinese liquor is Moutai. In 2011, a bottle of the rare 1935 Lay Mau edition (a variant of Kweichow Moutai), was purchased for US$1.55 Million.

It is so expensive because of its Moutai.

Kweichow Moutai, despite multiple unsuccessful attempts to trademark it, is often known as China’s national liquor. It is significant historically and culturally to the Chinese. It is often associated to the Chinese Communist Party’s former leaders; Kweichow Moutai, the favorite liquor of Mao Zedong as well as Zhou Enlai was also a favourite.

It has been traditionally served at Chinese state banquets, business events, and as a gift to diplomats. It was given to the People’s Republic of China at its founding in 1949. Zhou celebrated the 1972 summit between the United States and China with the drink.

Despite the company gradually increasing its production capacity, there is still a limited supply due to high consumer demand. According to the company, the only way to make the liquor in Maotai is to use the water from the Chishui River’s upper reaches.

Management tried to replicate and expand the production process in China and Maotai, but it was impossible due to differences in climate and micronutrient concentrations in the river water. According to them, the product was inferior in quality. Although this may partially be true, it is a marketing trick and a way for Kweichou Moutai to market the product as a premium one.

The long production process and laborious manufacturing steps add to the limited supply of Moutai. A fine mix of Kweichou Moutai takes approximately five years. The average inventory cycle and cash conversion cycles for the company are 1,490 days and 1,466 days, respectively, over the past 20 year.

Quality control is a manual process. The company still depends on master blenders’ personal tastes, techniques and methods passed down from generation after generation to make the liquor. This could also be part of the branding.

China has made it a ‘national intangible culture heritage’. However, the production method is still a trade secret. After a long approval process, visitors are not allowed to enter the plants. According to many who have tried it, the flagship liquor is characterized by distinct aromas that range from chocolate and tobacco to mushrooms and cheese. Its fiery, spicy, funky and savoury flavors are impossible to duplicate.

The baijiu is usually consumed in one go when Chinese say Ganbei, which is what they do at wedding dinners and other special occasions. The smell and taste of baijiu are often too strong for foreigners. China accounts for 97% of the company’s revenues. It has yet to expand into foreign markets. It may take some time before the liquor reaches foreign consumers. Kweichow Moutai-infused cocktails could be a good starting point.

Chinese consumers are becoming more wealthy, and so their desire to consume alcohol grows. Kweichow Moutai is a symbol of social status, wealth and power. Even though younger Chinese adults might not enjoy the drink as much, it is still a popular gift choice for Chinese businessmen as well as consumers. Vintage collectors and speculators have also noticed a rise in its popularity. This has fueled interest in both the company’s stock and the liquor.

What investors need to be aware of

In the past, Kweichow Moutai’s management and executives were involved in several high-profile cases of corruption. The company’s former chairman Yuan Renguo was a notable example of corruption. Yuan Renguo used his position to gain personal benefits by illegally granting distributor licences and pocketing approximately RMB230million and a five-kilogramme gold tripod as bribes.

The incident was featured in a TV documentary that was part of the government’s anti-graft campaign. Transparency is lacking because issues such as these are rarely mentioned in annual reports or company announcements.

China’s President Xi Jinping launched a broad anti-corruption campaign in 2012 The campaign bans extravagant spending on official overseas trips, vehicles, or banquets. The crackdown meant that Moutai’s sales were flattish in 2015 and 2013, partly due to the decline. However, its continued to grow in subsequent years.

Kweichow Moutai has been sneaky at the helm of its business. It allowed the parent company in 2019 to set up a wholly owned subsidiary which sells Kweichow Moutai’s products. The listed entity lost sales amounting to 13.6% of its net profit in 2019 and 6.3% of its revenues in 2019. Minority shareholders were not able to vote for the sale. Because the deal was below the threshold, shareholders were not able to approve it.

Kweichow Moutai was RMB247 Million in 2013 for allegedly violating anti-monopoly regulations. He had set a price floor to distributors. The company must also spend millions of renminbi annually on anti-counterfeiting efforts to eradicate fake Moutai.

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