China’s USD165b distiller changes course


Moutai Group’s new chairman is seeking to refocus the company back on its cash cow
Chief Investment Office09 May 2019
Photo credit: AFP Photo


CHINA & HONG KONG

China’s love of a fiery grain liquor made Kweichow Moutai Co Ltd the world’s most valuable alcohol distiller, and the company’s approach has been to milk that demand for all it is worth.

But now a change in leadership is bringing a U-turn in Moutai’s strategy. Li Baofang, the new chairman of parent Kweichow Moutai Group, is rolling back the efforts of his predecessor, Yuan Renguo, who quietly departed the company last May after 18 years at the helm and was removed on Sunday (5 May) from a key political position in the company’s home province.

Li is seeking to refocus the Moutai Group back on its cash cow: the Shanghai-listed arm that sells an ultra-premium line of baijiu – China’s national drink – embraced by the elite and increasingly coveted by the country’s rising middle class.

A customisation business is being halted, and subsidiaries that make alcohol for non-premium brands are being shut down to channel production resources to the listed arm, according to people familiar with the matter.

The parent group is also trying to sell directly to customers through the establishment of its own sales office, while cutting down the listed company’s 3,000-strong network of distributors.

Suspicion that a system of kickbacks had developed between liquor distributors and some of these units helped trigger the shift, say the people, who did not want to be identified discussing internal company matters.

The changes are creating a stir among investors. The Shanghai Stock Exchange has asked the company’s controlling shareholder to explain the reason for setting up a new direct sales company, along with its business model and plans, according to a company filing late Tuesday (7 May).

Kweichow Moutai Co Ltd has more than doubled in value over the past two years, after leapfrogging Diageo Co Ltd – the maker of Johnnie Walker whiskey and Smirnoff vodka – in 2017. Thanks to soaring demand for Feitian—the king of baijuis – Moutai’s gross profit margin has held around 90% for more than a decade, and the listed arm contributed 78% of the wider group’s revenue of CNY40.8b (USD6b) in 2014. That is expected to rise to 86% of the projected CNY100b in sales this year.

Moutai’s stock has lost as much as 12% this week (ending 10 May) amid concerns the new structure shifts power and sales to the parent group, away from the listed body. The shares fell 0.6% on Wednesday amid the global market selloff. – Bloomberg News.

The Shanghai Composite Index declined 1.12% to 2,893.76 and the Hang Seng Index tumbled 1.23% to 29,003.20 on Wednesday (8 May).

 

REST OF ASIA

New Zealand’s central bank cut interest rates to a fresh record low and hinted at the chance of a further reduction if necessary, becoming the first among developed-world economies to ease policy this cycle.

Governor Adrian Orr and his newly-formed Monetary Policy Committee decided that recent unexpected weakness in inflation and hiring warranted the Reserve Bank of New Zealand’s (RBNZ) first rate cut since November 2016. New Zealand’s dollar fell.

The move was in contrast to decisions by central banks in the US and Australia, which opted to look through weakening inflation. The pioneer of inflation-targeting is taking a more activist approach: In late March, Orr flagged prospects for a reduction and economic data have been soft since, with the inflation rate falling to 1.5% and hiring declining.

The RBNZ’s projections show the average OCR dropping to 1.48% by the end of this year and 1.36% by the third quarter of 2020. Asked at a press conference whether the RBNZ still has an easing bias, Orr said: “We think we’re in a good position to be able to observe the data as it unfolds. Our forecast track is a slightly lower path than just one cut, but the uncertainties around that path are large.’’

New Zealand’s economy has cooled, with annual growth slowing to 2.3% last year from 3.4% in 2017. Subdued business confidence and renewed fears of the impact of a trade war between the US and China on global growth are clouding the near-term outlook.

The RBNZ also cut its forecasts for economic growth on Wednesday, saying it now expects gross domestic product to increase 2.2% in the year through March 2019 compared to 2.9% previously. It sees growth rebounding to 3.2% in 2020. – Bloomberg News.

Australia’s S&P/ASX 200 Index was little changed on Thursday (9 May) morning at 6,268.80 after falling 0.42% to 6,269.15 on Wednesday.

South Korea’s Kospi Index was 0.67% lower to 2,153.52 in early-Thursday trading, extending Wednesday’s 0.41% loss to 2,168.01.

The Taiwan Stock Exchange Weighted Index (Taiex) shed 0.58% to 10,923.71.


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