China's baijiu culture runs deep, with unique terroirs producing legendary spirits. Kweichow Moutai, from Maotai town in Guizhou, ranks among the world's three great distilled liquors alongside Scotch whisky and French Cognac. Wuliangye, from Yibin in Sichuan, uses five grains in an ancient recipe. Luzhou Laojiao, also from Sichuan, is hailed as the 'ancestor of strong-aroma baijiu.' The baijiu sector, a rare 'core asset' in A-shares, offers stable earnings growth, excellent long-term returns, and quality equity structures, attracting foreign, institutional, and retail investors alike.
Let's examine the sector's performance through financial metrics.
Revenue:
Shanxi Fenjiu's revenue grew from RMB 3 billion in 2010 to RMB 26.2 billion in 2022, an 8.69x increase, with a 19.7% CAGR.
Moutai's revenue rose from RMB 11.63 billion in 2010 to RMB 127.6 billion in 2022, a 10.97x increase, with a 22% CAGR.
Net Profit:
Fenjiu's net profit surged from RMB 495 million in 2010 to RMB 8.096 billion in 2022, a 16.36x increase, with a 26.2% CAGR.
Moutai's net profit grew from RMB 5.051 billion in 2010 to RMB 62.72 billion in 2022, a 12.41x increase, with a 23.36% CAGR.
Profit Margins:
From 2010 to 2022, Fenjiu's average gross margin was 72.28%, net margin 20.29%.
Moutai's average gross margin was 91.67%, net margin 51%.
Moutai earns more per bottle sold, but this doesn't account for asset turnover or leverage. Still, the high margins indicate strong business models.
ROE:
From 2010 to 2022, Fenjiu's ROE was 27.16%, ROA 16.07%.
Moutai's ROE was 31.46%, ROA 24.65%.
ROE measures profitability, efficiency, and leverage. Let's decompose it using DuPont analysis.
DuPont Analysis
DuPont analysis breaks ROE into three components: net profit margin, total asset turnover, and financial leverage.
ROE = (Net Income / Revenue) × (Revenue / Assets) × (Assets / Equity)
A five-step version adds tax burden, interest burden, and EBIT margin.
Where:
- Net Income: after-tax profit
- Equity: shareholder funds
- Pretax Income: earnings before taxes (EBT)
- EBIT: earnings before interest and taxes
- Revenue: sales income
- Assets: total resources (cash, securities, plant, goodwill, etc.)
Basic Idea
DuPont analysis decomposes ROE into financial ratios, helping compare operating performance. Investors can focus on key drivers, and management can identify strengths and weaknesses.
Limitations
DuPont relies on accounting data that can be manipulated. Seasonal, industry, and accounting differences can distort results.
Shanxi Fenjiu (SH600589): 2022-12-31
Fenjiu's ROE rose from 42.51 to 44.31, while leverage fell. The improvement came from ROA: net profit margin increased significantly, driven by higher revenue and profit, reflecting strong demand.
Kweichow Moutai (SH600519): 2022-12-31
Moutai's ROE grew ~10%, mainly from revenue growth. Fixed asset investment and inventory increased (from 33.394 billion to 38.824 billion), indicating capacity expansion. Revenue grew faster (from 109.464 billion to 127.554 billion). Inventory turnover fell, meaning Moutai sold less than it produced, but aged baijiu appreciates, so we remain cautiously optimistic.
Stock Performance
From Jan 4, 2010, Fenjiu rose 17.597x (from RMB 12.86 to current). Moutai rose 18.34x (from RMB 100 to 1,834).
Historical Baijiu Bull Markets
1st: Jul 2005 – Jan 2008 (+1,235%): Monetary/credit easing, strong economic growth. 2nd: Oct 2008 – Jul 2012 (+616%): Policy stimulus, volume and price rising. 3rd: Jun 2014 – Jun 2018 (+317%): Post-adjustment recovery, consumption upgrade. 4th: Oct 2018 – Dec 2021 (+473%): Accelerated consumption upgrade, pandemic catch-up.
Bull logic: ① Policy boosts consumption, ② Demand recovery, ③ Earnings confirmation.
2nd bull: China's RMB 4 trillion stimulus in Nov 2008 boosted confidence; local governments borrowed heavily in 2009, driving investment and business/ government consumption. Baijiu output surged from 5.621m kiloliters in 2008 to 11.367m in 2012 (CAGR 19%), hitting 2015 targets four years early. In 2009, Moutai/Wuliangye/Luzhou Laojiao revenue grew 17.3%/40.29%/15.1%, accelerating in subsequent years.
4th bull: Oct 2018 State Council consumption promotion plan. Shift from 'drinking good liquor' to 'drinking famous brands' boosted concentration. Q4 2018 revenue growth: Moutai 34.1%, Wuliangye 31.3%, Luzhou Laojiao 21.8%.
Bear Logic
① Oversupply: big plants expand, small ones proliferate, demand-supply imbalance. ② Fundamentals deteriorate: wholesale prices under pressure, inventory builds. ③ Earnings underperform.
Post-2nd bull adjustment: Austerity measures (eight-point regulation) and plasticizer scandal in 2012 caused demand collapse. In 2013, most baijiu firms saw negative growth (Wuliangye -9.1%, Luzhou Laojiao -9.7%, Fenjiu -6.0%).
Where Are We Now?
1. Consumption Policies
H1 2023 retail sales grew 8.2% YoY, but June slowed to 3.1% (vs May -9.6ppts), due to uneven recovery and high base. Goods retail grew 6.8% in H1, 1.7% in June; catering grew 21.4% in H1, 16.1% in June, outperforming goods as offline scenes recovered. Urban retail grew 8.1% in H1, 3.0% in June; rural grew 8.4% and 4.2%. Rural recovery outpaced urban.
Overall, consumption recovered in H1, especially catering (closely tied to baijiu), but June saw a clear slowdown.
Consumer Confidence & Income
Consumer confidence index is near 5-year lows, showing weak recovery in 2023. Per capita disposable income growth picked up but remains below pre-pandemic levels (June 2023: +6.5% cumulative, +1.4ppts vs March). Income growth supports consumption capacity and willingness. Consumer confidence reversed its downtrend in H1 but is still weak. Stronger top-down policies are needed to restore confidence.
2. Baijiu Company Earnings
Moutai H1 2023: Revenue RMB 71 billion, +19.42% YoY.
Key correlated factors: GDP, disposable income, Feitian Moutai wholesale price, premium baijiu advance receipts.
3. Technical Analysis (Correlated with Foreign Holdings)
With economic recovery and improving fundamentals, a single-day surge broke through the downtrend channel resistance and the MA60 line, suggesting the correction may be ending and a third wave from 11,672.96 could begin.
Foreign capital (northbound) favors baijiu, and its inflows correlate with RMB exchange rate. In a range-bound market, foreign inflows drive baijiu upside. Watch RMB trends.
Bearish Views:
- Baijiu causes cancer; health-conscious middle-aged and elderly may quit. Sales will decline.
- Young people dislike baijiu culture and taste; low penetration among youth.
- Consumption downgrade; baijiu is limited to business and banquets. Economic weakness reduces business activity, diminishing baijiu's financial value.
Bullish Views:
- Baijiu is a soft addictive beverage; loyal drinkers repurchase.
- Drinking culture is deeply rooted; 'face' (mianzi) still matters.
- Baijiu has long production cycles; inventory isn't a problem—aged baijiu appreciates.
Baijiu has shown resilience through macro and policy cycles. Driven by government, business, and personal consumption, companies have adjusted structures. In weak macro environments, premium baijiu stocks and valuations hold up better.
Outlook:
Recent inventory cycles and wholesale price inversions, plus macro headwinds, have weighed on the sector. After a prolonged correction, pessimistic expectations are largely priced in. Valuations are at low levels. Recent consumption-boosting policies have restored some confidence. As baijiu is macro-sensitive, watch for recovery in the economy, back-to-school banquets, and peak season (Mid-Autumn/National Day) sales. Fundamentals could improve, and the sector may rebound. This could be a good entry point.
Historically, when baijiu corrections end, premium brands recover first—Moutai, Wuliangye, Luzhou Laojiao wholesale prices rise first. Premiumization remains the theme. Key picks: 1) Premium baijiu: high earnings visibility, deep moats. 2) Sub-premium baijiu: as economy recovers, channel expansion may resume; H2 earnings look promising. Focus on top performers.
