Kweichow Moutai

What does the company do?

Kweichow Moutai produces and sells Maotai or Moutai, known as China's national liquor. Moutai is made from red sorghum and served at state banquets and often presented as a diplomatic gift, cementing its brand leadership. In 1972, for instance, US President Richard Nixon and Chinese Premier Zhou Enlai toasted each other with Maotai at a banquet in the Great Hall of the People in Beijing. Moutai is produced only in the town of Maotai in China's Guizhou province. The baijiu cannot be produced in other parts of China let alone overseas. This is the result of the suitability of the climate, the source of water and locally produced raw materials (sorghum and wheat) and its traditional distillery techniques. This combination gives the liquor its unique taste reminiscent of soy sauce. A bottle of its Flying Fairy which sold in the 1980s for the equivalent of a dollar now retails for US$450. All this means that Kweichow Moutai has strong brand equity and a long history and rich heritage, which account for its wide domestic business moat. Why do we like the investment? Since 2017, Kweichow Moutal has overtaken Johnnie Walker-brand owner Diageo to become the world's most valuable liquor company. Moutai has never had a revenue or profit slowdown since 2001 – even during an anti-corruption clampdown in 2012-14. Demand for Moutai has continued to be resilient on the back of a trend towards direct sales and a product that has limited-purchase restrictions. Moutai remains the most desired baijiu brand. More broadly, China today has the world's second-largest economy. Rising wealth and living standards mean the country is moving rapidly to higher value goods and services. The key is identifying companies that can tap into these growing disposable incomes. China's 380 million millennials are earning and spending more than their parents ever did. This increased spending power is driving demand for premium products ranging from electric appliances to cars and high-end liquor like baijiu. These are some of the things people demand as they get richer. In our view, investors should focus on the prospects for Chinese consumers, especially at the premium end. We believe that Kweichow Moutai is well positioned for such a future.