Kweichow Moutai – Strong Brand Equity
Kweichow Moutai is China’s most reputable baijiu brand. Headquartered in Maotai Town, southwest China’s Guizhou Province, the company is principally engaged in the production and sales of Moutai liquor series products. According to a February 2015 report Brand Finance, an independent brand valuation and strategy consultancy firm, Kweichow Moutai ranks second in its top 50 spirits table with a brand value of $4.48bn. There are five Chinese brands in the top 50 spirits brands this year – Kweichow Moutai, Wuliangye, Yanghe, Luzhou Laojiao and Gujing Gong Jiu – all of which produce Baijiu. Kweichou Moutai brand value is significantly higher than its direct competitors in the Chinese market, giving it a competitive advantage that cannot be easily copied or replaced
The company’s main product portfolio consists of Kweichow Moutai liquors and other liquor series. Moutai, synonymous with luxury, makes up the bulk of the company’s operating revenue. The focus on Moutai series is justified by the high profit margin it commands. Gross profit margins for Moutai series is 93.67% while that of other series liquor is only 57.20%.
Kweichow Moutai – Bottoming Up From Anti-extravagance Campaign
Since 2013’s anti-extravagance campaign, the baijiu market has seen a steep decline. The government’s anti-extravagance campaign set strict limits on gifts which commonly include baijiu, as well as the use of public funds in wining and dining. Demand for premium spirits, usually as gifts and consumed in on-trade channels, declined dramatically in 2013 and 2014. In the super premium local spirits category, sales have fallen by 58% since 2011. In line with the entire industry’s price cuts, Moutai has slashed its prices by almost 50% since its peak in 2011.
However, prices have since stabilised according to Euromonitor with a slight rebound of about 2.5% in recent months. In 1H15, Kweichow Moutai reported revenue of RMB15.34bn from its flagship product range Kweichow Moutai liquor, an increase of 11.49% YoY. It also achieved 60% of its annual sales target by July 2015, which marginally exceeds its sales target. Furthermore, Moutai liquor sales made up of 97.19% of total sales, while government consumption only make up 5% of the total Moutai sales.
Kweichow Moutai – Valuations Lower Than During 2008 Crisis
Besides the fact that Moutai is currently trading below most of its peers, it is interesting to note that current valuations are also cheaper than during the 2008 Global Financial Crisis where it traded at about 20x P/E. As an alcohol manufacturer, earnings are relatively resilient. In spite of the anti-extravagance campaign, turnover and net profit still remained flat between 2013 and 2014. From 2010 to 2014, revenue and net profit have a CAGR of 29.0% and 32.1% respectively.