China’s favourite tipple may finally shake off its hangover

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If you think whisky burns, try baijiu, China’s national spirit also known as the country’s firewater. Distilled mainly from sorghum with an alcohol content of 53 per cent, the flagship drink made by distillery group Kweichow Moutai goes well with deep-fried, spicy Chinese dishes.

Sales of baijiu were such that for many years Kweichow Moutai was the most valuable onshore stock in the Chinese market. Its market value is more than double that of the country’s biggest electric-vehicle maker BYD. It surpassed Diageo’s market value seven years ago.

But the company lost its position as the biggest stock in China in June to the Industrial and Commercial Bank of China. As demand for high-end liquor slows in the country, Kweichow Moutai has suffered.

It is not all bad. Prices of liquor produced by Kweichow Moutai dropped more than a fifth in recent months, to about $300 per 500ml bottle. This is unusual during a time when China’s golden week holidays typically mean much higher demand. The company’s bottles which are seen locally as status symbols have had a rising collectable value, even making them an investment vehicle for some. But the economic slowdown and property market slump have meant lower spending on these bottles as collector items.

But even as prices and production of baijiu have declined in recent years, operating income has continued to soar. The drink still accounts for well over 90 per cent of China’s spirits sales contributing to Kweichow Moutai’s impressive profitability: its operating profit margin is 67 per cent and has stayed more than 60 per cent for well over a decade

More importantly, the drink’s popularity is catching on overseas. Exports have been rising to markets in Asia, Europe and North America with growth especially strong in South Korea.

Hong Kong’s leader pledged this month to revive the economy through measures including slashing liquor duties — from 100 per cent to 10 per cent for drinks with more than 30 per cent alcohol content. The lower duties apply only to spirits priced over $26, and for the portion above that amount. This should help baijiu sales.

Another unexpected boost could come from the ongoing trade spat between China and Europe after Beijing provisionally decided to impose sharp tariffs on French brandy, in retaliation for EU tariffs on Chinese electric cars.

Kweichow Moutai’s shares are down about a tenth this year, bringing declines down to more than 40 per cent from its 2021 high. That reflects the downturn in baijiu sales during the pandemic and the country’s strict lockdowns. A rebound in sales overseas, coupled with its recently announced share buybacks, may finally be enough to lift that hangover.

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