(Commentary on Chinese stocks, and the indexes that track them, is often done in the abstract with little time spent discussing the companies that make up what is now the second largest equity market in the world. In this article, the second in our series, we highlight one of China’s fastest growing companies and one of the largest liquor makers in the world.)
Planning a business trip to China to close the big deal? Prepare yourself for plenty of celebratory toasts with your hosts over lunch or dinner, as few things lubricate deal making in China like alcohol. Just don’t expect champagne, wine, or any of the spirits you drink with your office colleagues at happy hour on Fridays. Baijiu, China’s national drink, will likely be the beverage of choice. For anyone doing business or investing in China, understanding baijiu is a critical part of understanding China itself.
Baijiu is a Chinese cultural phenomenon, unsurpassed by any foreign drink despite the impressive inroads made by global liquor brands in the country in last two decades. It is not only the drink of choice at weddings, national holiday celebrations, and business gatherings, but an important status symbol associated with success, good fortune, and national pride. It is regularly used at government banquets since it was declared the country’s national drink in 1949 (upon the founding of the People’s Republic of China), and it was served by Mao to Richard Nixon in 1972 to celebrate the first visit by a sitting U.S. president to the PRC. Many of its finer brands, whose vintage bottles often sell at auction for the equivalent of thousands of dollars, are often given as presents on special occasions or to curry favor with business prospects or political leaders.
Baijiu is distilled from fermented grains that include corn, sorghum, rice, wheat, and sticky rice and is classified based on its aroma into four categories: sauce, light, strong, and rice baijiu. Each baijiu category is dominated by a different brand, each owned by a different company, three of which are publicly traded. Kweichow Moutai (600519 CN)—the largest liquor company in the world by market capitalization—dominates the “sauce” baijiu category. It is also the largest public company in China’s domestic exchanges, accounting for over 5% of the CSI 300 Index, despite a recent correction that clipped, at one point, almost a quarter of its value (and which MarketGrader wrote about earlier this year). We downgraded its stock, which used to be a perennial member of several MarketGrader China Indexes, in February on valuation concerns. It nevertheless still sports a ‘Hold’ rating based on our overall grade of 58 (out of 100).
The dominant brand in the “light” aroma category is Fenjiu, owned by Shanxi Xinghuacun Fen Wine Factory (600809 CN), and one of the most storied baijiu makers in the country. Its stock has gained almost 900% since we upgraded it from ‘Hold’ to ‘Buy’ in 2017 and, based on an overall grade of 71, it ranks 16th among all publicly traded Alcoholic Beverage makers in the world (out of 226). The company is currently a member of six MarketGrader China Indexes, including two tracked by VanEck ETFs: MarketGrader China All-Cap Growth Leaders (tracked by NYSE: GLCN in the U.S.) and CSI MarketGrader China New Economy Index (tracked by ASX:CNEW in Australia).
The dominant brands in the “strong” and “rice” aroma baijiu categories are Luzhoulaojiao and Guizhou Sanhua, respectively. Luzhou Laojiao Company, whose eponymous brand dominates the “strong” aroma category, is also a member of six MarketGrader Chinese Indexes. Guizhou Sanhua Co. Ltd, which owns the Guizhou Sanhua label, is privately held.
A “Return to Glory” Story
Shanxi Xinghuacan’s “Fenjiu” used to be China’s undisputed baijiu leader during the PRC’s first five decades, a crown it has since ceded to “Moutai” following management missteps in the mid 1990s. As the country’s economy grew following the “reform and opening” policies of the late 1970s and 1980s, Fenjiu took off as demand for it soared. The company rapidly expanded production capacity in the 1980s thanks to a shorter production cycle than that required for other types of baijiu, combined with low production costs and high production yields. In 1985 the company produced 11,500 tons of Fenjiu, making it the largest baijiu producer in China, and between 1988 and 1993 Fenjiu ranked first in baijiu sales nationally. In 1994 Shanxi Xinghuacan became the first listed liquor company in the PRC.
To continue growing market share, however, management focused on volume and a pricing strategy aimed at the mass market as the company sought to make Feijiu “the people’s liquor.” But as Chinese consumers were moving upmarket this caused the company to miss the massive rise of the premium liquor market as increasingly affluent drinkers sought new brands produced by its competitors. Its sales were rapidly surpassed in the late 1990s and early 2000s by Wulianye Yibin, Kweichow Moutai and Luzhou Laojiao, all ranked today among the largest liquor makers in the world. In 2017 the company embarked on an ambitious restructuring program seeking to reclaim lost market share and become a strong player in the premium baijiu market, the results of which have begun to show in recent years. Its premium Fenjiu brands, with labels such as “Blue and White,” “Panama Gold Medal,” “Laobaifen,” and “Bofen,” are now among the most sought after brands of baijiu in China. Additionally, the company has tapped into the country’s demand for lower proof, milder alcoholic beverages by successfully marketing its “Zhuyeqing” label as the leading “health” liquor in the country, turning it into one of the country’s top selling brands. Its Fenjiu brands have now reclaimed their leadership position in the “light aroma” baijiu category, helping the company post a 150% increase in sales in the last three years and in the process making Shanxi Xinghuacun Fen Wine Factory one of the 10 largest liquor companies in the world, as illustrated in Figure 1.
Figure 1. Ten Largest Public Liquor Companies in the World
|Company||Domicile||Market Cap||LTM Revenue||3-Yr. Change|
|Kweichow Moutai Co.||China||$431 bn.||$13.4 bn.||51%|
|Wuliangye Yibin Co.||China||$181 bn.||$8.2 bn.||80%|
|Diageo PLC||U.K.||$113 bn.||$14.7 bn.||-6.3%|
|Shanxi Xinghuacun Fen Wine Factory Co.||China||$63 bn.||$2.2 bn.||150%|
|Luzhou Laojiao Co.||China||$60 bn.||$2.4 bn.||60%|
|Pernod Ricard SA||France||$57 bn.||$9.7 bn.||-12%|
|Brown-Forman Corp.||U.S.A.||$38 bn.||$3.3 bn.||3.8%|
|Anhui Gujing Distillery Co.||China||$18 bn.||$1.5 bn.||51%|
|Davide Campari-Milano N.V.||Italy||$15 bn.||$2.2 bn.||-2.4%|
|Remy Cointreau||France||$10 bn.||$1.2 bn.||-10.4%|