In March, Kweichow Moutai became the world’s most valuable liquor company, and in June it became China’s most valuable stock. Though many outside of China may not have heard of it, this largely state-owned Chinese company’s main product is a liquor called baijiu, a white spirit distilled from sorghum.

How and why did Kweichow Moutai become so valuable? This week we introduce readers to Kweichow Moutai and explain some of the reasons behind its rise. 

Moutai is one of China’s top listed companies, and one of the fastest growing.

Kweichow Moutai’s market capitalization has risen dramatically in the past four years. The company, not even in the top 100 companies by market capitalization four years ago, is now ranked No. 15 in the world, according to data from CapitalIQ. In June, Kweichow Moutai surpassed the Industrial and Commercial Bank of China to become the most valuable company listed on a mainland Chinese stock exchange. 

Despite taking a tumble to the tune of $25 billion last Thursday, after the state-run People’s Daily published a post reminding readers of Moutai’s past links to corruption, it remains both the top beverage company and the top mainland stock by market capitalization. 

Kweichow Moutai is the world’s most valuable liquor company.

Though Kweichow Moutai’s market capitalization has risen quickly, its revenue, while still rising, has not kept pace. The company’s revenue rose 100 percent while its market capitalization rose more than 250 percent from four years ago. 

It’s worth noting that compared to its peers in the beverage industry, such as Coca-Cola, PepsiCo, and Anheuser-Busch, Kweichow Moutai’s market value appears outsized relative to its revenues. 

This and other factors have led some experts to question whether the stock is overvalued. James Angel, a professor at Georgetown who specializes in global stock markets, told The Wire that, while he doesn’t have an opinion on the stock’s value, “it’s easy to see how [Moutai’s] stock price could easily be prone to bubbles in which the price may be driven to values far, far above [its] fundamental value.” 

He pointed to the stock’s premium branding and potential for insider manipulation, along with the large government stake in the company as contributing to its high valuation. 

The government’s large stake in the company “artificially restricts supply, and that drives up the price,” he said, referring to the number of shares available to trade on stock exchanges. “So if the government were to sell all of its shares on the open market, that would depress the price, and you would see a more normal type of valuation for it.”

Kweichow Moutai’s buyers are largely Chinese.

Unlike other top beverage industry giants like Coca-Cola, Kweichow Moutai sales are mainly from a single product — the eponymous Moutai liquor. which accounts for 88 percent or more of the company’s revenue. And its buyers are overwhelmingly Chinese, with domestic purchases comprising roughly 95 percent of sales. 

Known for its patriotic pedigree, the drink has long been a favorite of Communist Party officials. Some of China’s most prominent leaders — including Mao Zedong, Zhou Enlai, Deng Xiaoping, and Xi Jinping — have toasted with baijiu at state dinners. 

Moutai’s marketing is targeted towards people born between 1960 and 1980, according to an October 2018 report by CLSA analysts. This demographic has a greater patriotic association with the drink and its history. The company has remarkably little digital marketing or targeting towards millennials, The Economist noted in a Jan. 2020 article. Some observers believe the focus on older demographics will eventually lead to a decline in sales as those generations disappear, though “premiumization” can help baijiu makers avoid this for now. 

At a price of 1,499 yuan, or $213 a bottle (some stores charge upwards of $400), Moutai is considered a premium brand. The government holds the wholesale price steady, but retail prices can rise to extravagant levels, with Bloomberg reporting bottle prices of 3,000 yuan or more in 2018. 

Part of its expense is driven by limited supply. The CLSA report noted that there is a “persistent undersupply” of Moutai, which they expect to last until 2023. Derek Liu, an analyst at China Market Research Group, told The Wire that he has heard Kweichow Moutai uses only 70 or 80 percent of its production capacity. 

“This means Moutai is building its own market,” he said. “They’re controlling their position and branding and perception of Chinese consumers about Moutai, because they want to make it premium and some kind of upper class.”

From start to finish, Moutai’s baijiu-making process takes about five years, and the length and complexity of its brewing and blending processes means few other companies attempt to make the same kind of baijiu. 

Most of its investors are also Chinese.

Shares of Kweichow Moutai are at least 65 percent owned by the state, with the next largest stake held by Chinese institutional investors, according to company financial statements. 

Kweichow Moutai is the highest-weighted constituent in MSCI’s China A Inclusion Index, which tracks the inclusion of the mainland-listed A shares in MSCI’s flagship Emerging Markets Index. The inclusion of Kweichow Moutai in the index means global assets are invested in the company, as many funds track the MSCI Emerging Markets Index. Asset managers such as BlackRock’s iShares and Capital Group hold tens or hundreds of millions of dollars’ worth of Kweichow Moutai shares in their China and emerging markets ETFs.

It’s often associated with corruption.

Moutai has long been a lubricant of corruption, with military and government officials able to get bottles of it on the cheap and resell it for high profits. 

The drink was a favorite of officials at all levels — before the government’s 2013 effort to reduce corruption, about 30 percent of baijiu was consumed by officials, according to CLSA. The Atlantic reported that the 2013 crackdown devastated the economy of the village of Maotai, in Guizhou province, the hometown of Kweichow Moutai. (Much like champagne and other expensive liquors, baijiu can only be called “Maotai” if it is made by Kweichow Moutai, in Maotai town.)

Since then, consumption of baijiu has shifted towards consumers and away from the government, the CLSA report said. 

However, Moutai has faced further crackdowns on corruption in the past year, with nine former officials arrested, according to Caixin, and hundreds of dealers dropped. Top Kweichow Moutai executives were reportedly taking bribes from officials who wanted lucrative Moutai distribution licenses. In one case, the company’s former chairman, Yuan Renguo, not only approved the distribution businesses but also provided hundreds of tons of Moutai as a gift to Wang Xiaoguang, a former vice-governor of Guizhou who is now serving time in prison for graft.  

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Hannah Reale contributed reporting and Sam Sharpe contributed research.