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    600519   CNE0000018R8

KWEICHOW MOUTAI CO., LTD.

(600519)
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Kweichow Moutai : China's Liquor Giants Intoxicate Investors

12/21/2020 | 05:45am EDT

By Chong Koh Ping

A dizzying rally this year has put China's top distillers firmly in the ranks of the world's most valuable consumer-goods companies.

Shares in Kweichow Moutai Co., which at the start of 2020 was already the world's biggest alcoholic-drinks company by market capitalization, have gained 56%, valuing it at about $354 billion as of Monday. That means not only does the state-owned enterprise tower over Western rivals like Diageo PLC, and brewing giant Anheuser-Busch InBev SA, but it is also bigger than Coca-Cola Co., LVMH Moët Hennessy Louis Vuitton SE or Toyota Motor Corp.

Rival Wuliangye Yibin Co.'s share price has more than doubled, for a market cap of $167 billion. An index of 36 drinks companies whose shares trade in Shanghai or Shenzhen rallied 86.7% this year, compared with a 23% increase in China's CSI 300 benchmark, according to Wind.

The index also includes beer companies, but the most valuable players are mostly distillers who specialize in baijiu, a fiery Chinese spirit made by fermenting sorghum or other grains. Moutai's drinks, which have an unusual aroma reminiscent of soy sauce, have traditionally been served at state banquets, making them a homegrown status symbol for affluent Chinese.

Investors and analysts credit China's quick recovery from the new coronavirus, Chinese drinkers' growing thirst for pricier drinks, and some smart corporate initiatives for the hot streak.

"The industry is riding on the power of the middle class," said Allen Cheng, an equity analyst at Morningstar in Singapore.

Lockdowns hit the country hard in the first quarter, but a swift turnaround since then has put China on track to be the only major economy to grow this year. As of the third quarter, disposable incomes were growing again, rising 0.6% from a year earlier, official statistics show.

Foreign institutions are among the industry's fans. As of September, Moutai was one of the biggest holdings in U.S. money manager Capital Group's New World Fund, for example. The fund's stake was worth nearly $627 million.

Eva Wang, a Greater China research analyst at J.P. Morgan Asset Management, said Chinese consumers were buying higher-end products as their incomes rose, favoring market leaders in alcohol and in consumer staples more broadly. That meant Moutai and Wuliangye have grown sales and earnings faster than rivals, boosting their market share, she said. Analysts polled by FactSet expect the duo to grow earnings by 13% and 17%, respectively, for 2020.

The two giants have both overhauled parts of their business, too. Moutai is reducing its reliance on traditional distributors and is selling more drinks directly online, which lets it boost profit margins without dampening demand. Mr. Cheng at Morningstar said Moutai had struggled to end long-term relationships with distributors last year, but the pandemic helped it move faster.

For its part, Wuliangye has spent more on branding. It has also embraced a digital approach, such as using QR codes to track sales and manage inventory. This has made it more efficient and more responsive to consumer demand, analysts say.

Shen Zhifeng, an analyst at UOB Kay Hian in Shanghai, said the changes set the companies up well for 2021. "Their good performance can continue through next year," he said.

The run-up has sent valuations soaring. Moutai and Wuliangye shares trade at 42 and 43 times forecast earnings respectively, according to FactSet. Over the last five years, the average ratios have been 25 and 22 times, respectively.

Some observers see other reasons for caution. Euan McLeish, an analyst at Sanford C. Bernstein, said a fresh anticorruption drive seemed to be on its way. In 2012 and 2013, a crackdown on graft in China pummeled Moutai stock, since the drink is popular at official dinners and for gifts.

In July, a social-media account run by the People's Daily, the Communist Party mouthpiece, said Moutai shouldn't be used for speculation or bribes, causing a brief stock selloff.

In addition, Mr. McLeish said he had more corporate-governance concerns about Moutai than Wuliangye, since it is rather opaque about targets and strategy. Moutai is controlled by a local government in the southern Chinese province of Guizhou.

Write to Chong Koh Ping at chong.kohping@wsj.com

(END) Dow Jones Newswires

12-21-20 0544ET

Stocks mentioned in the article
ChangeLast1st jan.
KWEICHOW MOUTAI CO., LTD. -0.32% 2074.97 End-of-day quote.3.85%
WULIANGYE YIBIN CO.,LTD. 1.02% 299.89 End-of-day quote.2.75%
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Financials
Sales 2021 111 B 17 157 M 17 157 M
Net income 2021 53 896 M 8 316 M 8 316 M
Net cash 2021 179 B 27 609 M 27 609 M
P/E ratio 2021 48,4x
Yield 2021 1,05%
Capitalization 2 607 B 402 B 402 B
EV / Sales 2021 21,8x
EV / Sales 2022 18,6x
Nbr of Employees 29 031
Free-Float 38,0%
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Mean consensus BUY
Number of Analysts 32
Last Close Price 2 074,97 CNY
Average target price 2 318,02 CNY
Spread / Average Target 11,7%
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Managers and Directors
NameTitle
Jing Ren Li General Manager & Director
Gang Liu CFO, Board Secretary, Chief Accountant & Deputy GM
Wei Dong Gao Chairman
Ya Lin You Chairman-Supervisory Board
Jin Hai Lu Independent Director