Kweichow Moutai 2023 Results Preview
A quick look at the most valuable spirits brand in the world
More than forty years after Deng Xiaoping’s monumental decision to “reform and open up”, Western spirits still only make up a tiny percentage of the Chinese market. Baijiu, the traditional Chinese spirit with a rich history and cultural significance, dominates the domestic market with more than 90% market share. It continues to be the primary spirit consumed in during social gatherings, celebrations, and formal meetings alike.
Of the iconic baijiu brands, no gem shines brighter than Kweichow Moutai (SH: 600519). The business is unrivaled on every front:
2.15T CNY market cap (~300B USD), the highest in China’s A-Share market.
11-bagger in 10 years, not including dividends.
230-bagger since IPO, not including dividends.
92% gross margin and 50% net profit margin, on par with luxury brands such as Louis Vuitton, Hermes, and Ferrari.
Consistent 30% ROE for over 20 years.
The top baijiu brand in China given its storied history, premium brand, and reputation for quality.
In China, the baijiu you serve during business meetings has a lot of subtle meanings. Moutai is the #1 choice to show your sincerity, unless you know the guest prefers another brand.
What makes this business so interesting is its PREDICTABLE earnings. You don’t need to know anything about AI growth trajectory, interest rate change, or oil futures. Due to its coveted status, we only need to focus on the supply to estimate future earnings. How many businesses in the world can we claim to accurate forecast?
Since Moutai provided preliminary guidance in December 2023, let’s do a quick dive before the official 2023 annual report comes out in early April 2024.
2023 Earnings Preview
The announcement is very short:
~57,200 tons in Moutai production
~42,900 tons in Series production
Note: Here Moutai refers to the premium flagship product Kweichow Moutai (106 proof or 53% ABV), whereas Series refers to a family of products made by the same company targeting a different market segment.
Estimated revenue of 149.5B CNY
Moutai revenue of 125.8B CNY
Series revenue of 20.4B CNY
The remaining 3.3B CNY is interest income from Moutai’s cash pile (an interesting point saved for another day)
Estimated net income of 73.5B CNY
Revenue is up 20.5% and net income is up 17% YoY. Specifically, Moutai revenue is up 17% and Series revenue is up 28%. Net income remains at a spectacular 49%.
The business trades at 29x 2023 P/E. For one of the highest quality businesses in China (if not in the world), this is a reasonable multiple.
But to estimate intrinsic value, we need to look forward at future production.
Moutai’s Unique Production Cycle
To understand the business, we must understand the Moutai production process.
Around June of each year, wheat grains are processed and fermented for three to six months. Around October of each year, sorghum grains are steamed and fermented. Fermented sorghum forms the foundation of the unique Moutai taste.
In total the grains are steamed nine times, fermented eight times, and distilled for seven rounds. Each round produces a distillate of very different taste and quality. It is a time intensive process, which is as much art as science. When all seven rounds of distillation are complete, it is summer again and the production cycle repeats.
The newly distilled jiuqu is now stored for three years in Moutai’s warehouse in the Moutai village ecosystem before a master distiller blends different varieties of current distillates and old blend into the signature Moutai. That is stored for another six to twelve months before being packaged and sold. It’s roughly a five-year process, or four years since storing the distillate.
This is a very brief summary of what is one of the most sophisticated and fascinating production methods in China. Through a rigorous scientific culture cultivated for decades, Moutai has significantly grown its production volume without sacrificing quality (thanks to its chief architect and spiritual “founder” Ji Keliang, who is over 80 years old and has worked at the company since the 1960s). More importantly, the specific location and climate in the Moutai region is critical to the spirit’s unique characteristics.
Note: I am not discussing the competitive moat in this piece, because that requires a much more thorough discussion on Chinese history and culture.
Estimating Moutai’s Revenue
Since it takes around five years to produce Kweichow Moutai (four years after distillation), we can estimate production volume by referring to each year’s base distillate production volume. We don’t really care about latest performance, since the stock is already priced in the short-term based on forecasts made several years ago.
For example, the company sold over 37,901 tons of Moutai in 2022. This is roughly 76% of base distillate produced in 2018, or yield. Over the years the yield fluctuates between 75% and 85% due to the artisanal production process and the master distiller’s judgement call. Some years require a higher percentage of current base distillate, and other years require a bit more of the “old” base spirit to balance the flavor.
In contrast to estimating supply, the demand question is much easier to answer. Moutai is easily sold with very little idle inventory. Plus, it’s aged spirit, so if it’s not sold it only becomes more valuable like Scotch whiskey. We can estimate consumer demand by comparing the 969 CNY MSRP against the 2000+ CNY one must pay to actually buy a bottle of Moutai at retail. During the craze in early 2021, a bottle of Moutai fetched for over 3000 CNY.
There are three components to estimating revenue.
Kweichow Moutai (signature product)
Series Spirit (fast growth segment)
Interest Income (which I will skip since it’s a small percentage of revenue)
My estimation here provides the general idea, but actual revenue will vary depending on factors like actual production volume, pricing, and sales channel mix (described below).
Kweichow Moutai 2026/2027 Revenue
We know that Moutai’s 2022 revenue was 107.8B CNY. That equates to ~2.85MM CNY per ton. Given that Moutai initiated a 20% price hike in late 2023, let’s assume 3.5MM CNY per ton in the future. While I believe price will be raised again in the medium term, it depends on various economic and political factors.
We know Moutai’s 2022 production of 56,810 tons and 2023 production of 57,200 tons. Assuming 80% yield, that equals 45,450 tons sold in 2026 and 45,760 tons sold in 2027. Based on the 3.5MM CNY per ton metric, that is 159B CNY in 2026 revenue and 160B CNY in 2027 revenue.
Moutai historically has a net profit margin of 50%. That means 80B CNY in 2026 earnings and 2027 earnings. An important distinction of Moutai is that distributors must pay before receiving inventory, hence actual cash flow is usually higher than net income. Given the lack of re-investment opportunities, free cashflow is extremely high.
Using a 25x multiple, this segment is worth 2T CNY, or 93% of current market cap. At 30x P/E this is worth 2.4T CNY, or 11% upside from today. In this base case, I assume no price increase for the next four years and a relatively conservative 80% yield, which can increase to 85% in “good” years.
To be more optimistic, revenue can hit 170B CNY in 2027 if we account for better yield of 85% and 200B CNY if we also include a 20% price hike, which is within historic norm. At 100B annual net profit, the current market cap is only 21x of estimated PE. Hardly expensive for a business of this quality.
Note: Moutai’s long-term production volume is worth discussing for another time, as it involves in-depth analysis of the local geology, ecology, and breaking down Moutai’s construction budget in addition to de-ciphering local regulations and political climate. We can safely assume 57,000 tons in the near term based on public disclosure.
Moutai Series 2026/2027 Revenue
Moutai Series production method varies in length, but averages around 2 years. This is the faster growth segment of the company, which keeps taking market share from other medium-tier and upper-tier producers. Its success speaks volumes about Moutai’s brand power and consumer mind share.
Note: I will write about the major baijiu brands and the industry competitive landscape at another time.
Moutai has ramped up the production for its Series division since previous Chairman Li Baofang took charge in the early 2010s. Based on public disclosure, production has grown from 20,545 tons in 2018 to around 42,900 tons in 2023. The company planned for 56,000 tons in production volume but due to pandemic restrictions the expansion project has been stalled. 2023 volume is only 77% of the original plan. It’s hard to estimate exactly when the 56,000 tons target will be reached, but we can make an educated guess.
The 2023 production volume of 42,900 tons is about 52% higher than 2021 production of 28,250 tons. Series segment 2021 revenue was 12.6B CNY. The estimated 20.4B CNY 2023 revenue is a 62% increase, so we assume that there has been approximately 5% price increase.
If we assume the 56,000 tons target to be complete by 2025, then the pending 30% increase in production and another 10% price increase will result in 29B in 2027 revenue. Assuming 20% net profit margin (which will likely be higher), that translates to 6B CNY in earnings. At 25x multiple, this is worth 150B CNY.
If we estimate in a linear fashion (which is optimistic), then the 56,000 tons target is almost double the 2021 production numbers. Double the 2023 revenue, you get 40.8B CNY in 2027, two years after the assumed 2025 project completion. Assuming 20% net profit margin, that is roughly 8B in earnings. At 25x multiple, this is worth 200B CNY.
Note: There is room for further growth based on price increase, production volume, and margin expansion. My estimates are only based on production volume.
I think 30x multiple for this segment is a bit high due to the more competitive market landscape. But if the Series segment continues to gain market share from other competitors, raise prices more than 10%, ramps up production sooner than 2025, and improves net profit margin, then this segment will be worth a lot more.
The top six baijiu brands in China are Kweichow Moutai, Yibin Wuliangye, Luzhou Laojiao, Shanxi Xinghuacun Fen Wine, Jiangsu Yanghe, and Anhui Gujinggong. Moutai Series’s 150B to 200B CNY estimated value places it ahead of Jiangsu Yanghe (154B CNY market cap), making it a top 5 baijiu brand on its own. It’s similar to how Apple has created another Fortune 100 brand with the Watch/AirPods product line.
Moutai Combined 2027 Revenue
A brief summary of my estimation is as follows.
Kweichow Moutai main segment (base case):
80% yield (~45,760 tons) and no price increase (3.5MM CNY per ton)
160B CNY revenue
50% net margin
80B CNY in earnings
2T CNY at 25x PE (very fair)
2.4T CNY at 30x PE (reasonable)
Moutai has never traded below 20x PE after 2018, as institutional investors reached consensus.
Kweichow Moutai main segment (bullish case):
85% yield (48,620 tons) and 20% price hike (4.2MM CNY per ton)
204B CNY revenue (round down to 200B)
50% net margin (assume no margin expansion)
100B CNY in earnings
2.5T CNY at 25x PE
3T CNY at 30x PE
Current 2.15T CNY market cap is 21.5x estimated PE, a highly attractive valuation for a high-quality business.
Moutai Series segment (base case)
Assume 56,000 tons production target complete by 2025, so full production volume available for sale by 2027.
29B CNY in 2027 revenue
20% net margin (which is conservative for upper-tier brands)
6B CNY in earnings
150B CNY at 25x PE
Moutai Series segment (bull case)
Double current 2023 revenue of 20.4B CNY
40.8B CNY in 2027 revenue
20% net margin (assume no margin expansion)
8B CNY in earnings
200B CNY at 25x PE
The range of combined valuation goes from 2.15T CNY to 3.2T CNY. If Moutai goes up like it usually does during bull market, who knows how high the multiple will go…
In summary, you are buying a company with 80B CNY and in bullish case up to 110B CNY (20x PE) estimated net profit in 2027.
The worst you can do is getting a business with 74B CNY in earnings in 2023 (29x PE), which will very likely grow to 80B in the near term (27x PE). By doing so you value the Series segment at zero, as well as the interest income coming from the many billions of CNY on the balance sheet. These are your margin of safety. I value the business at 25x multiple to be conservative, assuming a 4% risk free rate.
A quick note on Moutai’s capital allocation. For political and social reasons the company does not run a lean balance sheet (Moutai is the biggest export of Guizhou province). However, over the last several years the company has issued special dividends to distribute excess cash. It’s unlikely that the company will buy back its stock at current valuation, but for a state-owned enterprise, special dividend is more than enough for minority shareholders.
Not to mention that Moutai has a new hidden optionality that is hiding in plain sight. Despite frequently making the headline in Chinese media, many investors gloss over this crucial strategic pivot.
Hidden Optionality: Direct to Consumer/iMoutai
Moutai has done a few collaborations with consumer brands to develop brand awareness among the younger generation in recent years. One is a chocolate with Dove. One is a baijiu-infused ice cream. And lately the buzz is the Moutai latte in collaboration with Luckin Coffee. These marketing stunts do not meaningfully move the needle, but Moutai is actually quietly working on something that can be huge.
That is the e-commerce app, iMoutai. This has been one of the most downloaded apps in China and brought in over 11.9B CNY in revenue in its first year of launch. Talk about going viral! Who would have assumed the fastest e-commerce platform is developed by a state-owned enterprise and sells only “firewater” spirit??
But the success of iMoutai illustrates the shift in Moutai’s sales channel mix. Direct to consumer channel has grown from 6% in 2018 to 40% in 2022. The genius of iMoutai is that it offers a major opportunity for Moutai to capture a larger share of the final consumer price and ensure its product reaches genuine enthusiasts. Consumers benefit from better access and fairer pricing compared to traditional distribution channels. The legacy distributor network is largely insulated from market competition, as they receive allotted Moutai inventory and flip them to consumers at astronomical markup (sometimes over 200% MSRP).
Moutai doesn’t need to sever relationship with existing distributors. It just needs to place a cap on legacy distributors and move more future inventory to the direct channel. Traditional distributors must comply or they will no longer be able to sell Moutai and earn money hand over fist.
We can safely assume 50% of revenue going through direct channels in the near term and over 70% in the long term, if not higher. iMoutai will likely reach 20B CNY revenue in 2023. This means the additional 20% price hike in the bullish case may be realized even sooner than expected without changing current pricing. Hence this is Moutai’s hidden optionality. This is an interesting case of grey pricing and arbitrage, and in this case the company is trying to arbitrage its own products from the legacy distributors.
Conclusion
In conclusion, Kweichow Moutai is not richly valued like it was in early 2021 with a 3T CNY market cap. In the Oct 2022 52-week low of around 1.7T CNY market cap, the company was a bargain at 23x 2023 earnings and 20x estimated 2026/2027 earnings. We can estimate the cashflow of this business for the foreseeable future, while each year of production volume increase and occasional price increase allow us to revise the intrinsic value higher.
Over the medium to long term, we want to keep track of the evolving tastes of consumers, which will affect demand for Moutai and its Series products. But given the shortages over the last several years and the skyrocketing in final costs passed on to the consumers, we believe Moutai will continue to print cash for years to come. Based on its strong brand moat, upmost quality, predictable cash flow, and potential for future growth, Kweichow Moutai could be an attractive investment opportunity at a compelling valuation.
Note: This essay is written with editorial assistance from Google Bard (none for research, only for stylistic and grammar suggestions). Please do your own due diligence.
Wonderful overview. Definitely a fascinating company. Will look forward to the publishing of the moat aspect of the business - the historical/cultural aspect is something I know too little about.