Breakingviews – Moutai ladles out value from its punch bowl

A customer walks past a glass case displaying Maotai liquors with different price tags at a supermarket in Shenyang, Liaoning province August 8, 2012. The makers of China’s fiery liquor baijiu, a pricey, potent drink that is a staple at state dinners, say it inspires poets and can even ward off dementia. For investors in the largest baijiu makers Kweichow Moutai Co Ltd and Wuliangye Yibin Co Ltd, the appeal is more mundane: the companies paid out huge dividends and raised earnings forecasts when a slowing economy had prompted dozens of Chinese firms to issue profit warnings. Picture taken August 8, 2012. REUTERS/Stringer (CHINA – Tags: BUSINESS)

HONG KONG (Reuters Breakingviews) – The streets of China are getting paved with baijiu. Chinese liquor titan Kweichow Moutai plans to issue bonds to help buy highway operator Guizhou Expressway from the struggling local government. This ludicrous diversification erased $10 billion of market capitalisation.

Moutai has long been linked to infrastructure projects in unfavourable ways, but not like this. Sales for the $310 billion distiller have been known to rise alongside public spending on roads and bridges, as politicians and contractors hobnob over deals.

This time, the correlation is even more obvious. Kweichow Moutai’s parent company applied to sell up to 15 billion yuan ($2.2 billion) in bonds to pay for a stake in Guizhou Expressway, a state enterprise spearheading projects for the highly indebted province. Moutai also approved a decision this week for its finance subsidiary to invest in fixed-income securities, a sign that it may start helping fund Guizhou province’s gigantic debt pile.

It’s easy to see why the local government would want to drink from Moutai’s punch bowl. The company is the largest in China by market value after an incredible five-year run in its stock price and fetches a robust 38 times expected earnings. A total annualised shareholder return of 58% over that span trounces international alcohol peers such as Diageo and Remy Cointreau, as well as the 10% generated by the Shanghai Shenzhen CSI 300 Index.

Kweichow Moutai is also increasingly being stocked in portfolios overseas. It is the biggest constituent in the MSCI’s China A-share index and heavily traded on the pipeline between the Hong Kong and Shanghai markets. For foreign investors especially, Moutai’s wander into highway maintenance is a sobering reminder of how the country’s listed companies can be called on to serve.


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