It may be surprising to many that the most-consumed (and best-selling) alcoholic beverage in the world is not Johnnie Walker or Jack Daniel’s, but a traditional grain-based spirit known as baijiu that originates from China.
Baijiu, or “clear liquor”, dates back 9000 years in China… drunk by both the aristocratic elite and peasants alike. Today, the drink is a popular favorite in Chinese celebrations, business meetings and even simply between friends.
One of the most expensive and most-recognized baijius in the market is the famous Moutai (or Maotai), made only in Moutai town by the listed Chinese producer Kweichow Moutai Co (SSE:600519).
Over the last 20 years, Kweichow Moutai’s stock has become a superstar 160-bagger, having increased by 17,500%!
We don’t think it’s over yet.
In this article, we’ll discover more about this fascinating company and why we think it still can grow even further.
China’s National Liquor
Moutai is China’s most famous baijiu. It was a favorite of Mao Zedong, the founding father of modern day China, who had it served at state dinners and offered to foreign dignitaries when they visited China.
Since then, Moutai has taken the lead with over 70% in market share – and had enjoyed huge pricing power with over 80-90% gross margins for the past 20 years.
Also, check out the earnings, dividends, and free cash flows for the last 5 years. Very impressive isn’t it.
You may be wondering if this trend is sustainable. Besides its brand value, Moutai has a couple of very strong competitive advantages going for it.
Moutai has a very distinct fiery taste which is almost impossible to replicate. The grains that make up this taste come from Maotai town – located in very humid environs of Guizhou in the southwest of China.
According to online sources, the grains are located near a riverbank where the water is pure and contains high concentrations of micronutrients that give the Moutai a hint of soy sauce flavor.
This river, known as the Chishui River is heavily protected by the Chinese government to ensure the water (an important input for making Moutai) remains uncontaminated.
In addition, distillation is done entirely through traditional methods and highly-experienced tasters, who control the distillation process to ensure each pot carries that consistent, high-quality “Moutai” taste.
Age-Old Moutai in A New Decade
Over the last decade, China has grown rapidly to become the 2nd largest economy in the world.
In that time, it has pulled millions of its population out of poverty and into a middle class that is tech-savvy and leads a good quality of life.
With more disposable income per capita, Chinese people are more willing to spend on high-end baijius like Moutai.
This is one of the key drivers for the exploding growth in Moutai’s operating numbers (and in their stock price) the past couple of years.
And it still has a long way to go.
The visual below shows the income groups of China pitted against those of developed economies (like US and Germany).
Notice that China’s low income group (orange bar) still has much more room to fall, and typically much of this population group will graduate to the lower-middle class (which is currently the case).
As the economy develops further, the current lower-middle income group will begin to graduate to the upper-middle or high income group… and this gradation will continue until the lines look like those of a developed economy.
McKinsey estimates that by 2022, most (54%) urban households would fall under the upper-middle class group – earning between US$16K – US$34K per year.
Hence, more wealthy people, more demand for baijiu (and possibly higher stock prices for investors).
Hungry For Growth
Moutai also isn’t simply resting on its laurels waiting for these consumption tailwinds to shore up its growth.
With low debt and a huge free cash flow of around 40 billion CNY (FY2019), Moutai is heavily expanding into new direct-to-consumer sales channels, partnering ecommerce sites, and even exporting its baijiu overseas.
Quick Conclusion
Moutai’s nationalistic roots, inimitable brand power, and promising growth has helped skyrocket its stock price over the years, overtaking (and even doubling) the London-listed liquor powerhouse Diageo plc in market cap.
The “white horse” of China’s stock market, Kweichow Moutai is one company any investor who believes in the China growth story should dive deeper into.
Hi, I am from South Africa. What must I take into account if I want to invest overseas and use your app? Thanks Tilly
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