alcohol consumption

Maotai consumption bucks slowdown, brews crisis

Profits of Chinese distillers seem immune to the depressed economy, but analysts worry about unsustainable profit margins.
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Maotai, China's national liquor
<div style="text-align: left;"> Maotai, China's national liquor </div>

Foreign luxury brands convey a certain status in China, but the highest esteem derives from a homegrown product: maotai, a fiery liquor made from sorghum.

Maotai was reserved for party leaders for many years and gained international exposure when Zhou Enlai used it to toast former US president Richard Nixon during his landmark visit to the country in 1972. It remains an essential item at government banquets.

Although maotai is mostly consumed by mandarins, investors are enjoying the sweetness of its profits even as other investments sour amid an economic downturn that reduced growth to 7.4% in the third quarter.

The Shanghai-listed maker of maotai, state-owned Kweichow Moutai Distillery, increased net profit by 58% to Rmb10 billion ($1.66 billion) for the first three quarters of this year, while total revenue climbed 46% to Rmb19.9 billion.

The company earned more than Rmb10 a share between July and September, the highest of any A-share company. CICC, a Chinese investment bank, estimates earnings will reach Rmb13.1 a share in 2012.

Investors that bought the company’s initial public offering in 2001 are laughing all the way to the bank. The share price has soared from an initial Rmb31 to a peak of Rmb260 in August 2012. The stock is currently trading at 18 times its 2012 forecast earnings.

Based in Guizhou, one of the poorest provinces in China, Kweichow Moutai is among the biggest and most profitable companies in the country. Its average market capitalisation is on a par with China’s top property developers and steel makers, while its 90% profit margins easily eclipse the global luxury brands.

Led by Kweichow Moutai, all 14 of the distillers listed on the A-share market recorded strong results this year, according to Wind, a financial statistic provider. The combined net profits of Kweichow Moutai and Wuliangye Yibin, a rival liquor producer, exceeded the total net earnings of all 43 home appliance companies. Distillers also enjoy an average profit margin of more than 60%, which industry analysts describe as “abnormal and unsustainable”.

Beijing has started cracking down on officials who abuse tax money and has banned maotai at official banquets. Even so, the retail price for a bottle of maotai soared from Rmb155 in 2001 to as much as Rmb2,000 in 2012 — not the kind of drink that ordinary households could possibly afford.

Some local governments complied with Beijing’s prohibition. Guangdong’s Baishun county, in an effort to promote its thrifty image yet still satisfy high-ranking guests, started brewing its own liquor.

The rampant consumption has given rise to a joke that the liquor swilled by officials each year could fill Hangzhou’s entire West Lake.

China claims that Maotai, which normally has a 53% alcohol content, is as famous internationally as Scottish whisky and French cognac.

As competition among distillers has grown in recent years, Guizhou officials defended maotai’s rank as China’s “national liquor” because of its mellow fragrance and medicinal qualities — it is claimed to relieve colds and headaches.

Perhaps that’s why Chinese officials consume so much of the stuff — they have a lot of headaches to cope with.

¬ Haymarket Media Limited. All rights reserved.
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