Hey bartender, line up some baijiu shots for Kweichow Moutai’s shareholders. Shares of the $300 billion maker of China’s top-shelf white liquor took a beating after state media lambasted it for lubricating graft, erasing $25 billion of market value in a day. While Moutai is still up 40% this year, anxiety among Beijing officials over stock bubbles and corruption present new challenges to its impressive rally.
Moutai fared poorly during the anti-corruption campaign President Xi Jinping launched in 2012. With state media portraying official banquets as saturnalias of embezzlement and waste, Moutai, which is customarily spun at the celebratory centre of Lazy Susans, saw growth freeze. As pressure eased, it turned out survivors of the purge needed a stiff drink. Many poured tall glasses of “Flying Fairy”, Moutai’s flagship tipple, weighing in at a flammable 53% alcohol-by-volume.
Moutai revenue popped 56% in 2017, unleashing a massive, multi-year rally that might have finally found its peak. Having gained 1,600% from its 2014 nadir, its equity is now worth more than Diageo, Pernod Ricard, Brown Forman, Remy Cointreau, Davide Campari Milano and Constellation Brands combined. After an impressive 17% profit bump in the first quarter, the company trades around 40 times forward price-to-earnings, nearly twice that of Diageo, thanks to a 46% net profit margin.
That’s not sustainable for a host of reasons. For starters, Beijing probably doesn’t love the fact that its biggest listed company is a poster child for drunken bribery. More fundamentally, Moutai’s average revenue growth rate will slow from 30% to 11% in the upcoming five years, Morningstar forecasts. Profit margins are inflated now because marketing expenses have been frozen. That won’t last, and as costs rise, shares will look more overpriced.
Then there’s the inebriated state of Chinese alcohol stocks. The CSI Liquor Index is up 36% in 2019, pulled by lesser-known peers like Jiugui Liquor, up nearly 100% this year. Moutai’s political image is still recovering from an ex-chairman’s arrest last year. Today, with the government pushing infrastructure spending – which drives booze sales in China for the wrong reasons – officials running the political rectification campaign scheduled for 2021 may well view Moutai’s share price as a corruption barometer. Last call is coming for shareholders.