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Kweichow Moutai's charitable turn will be real market drag

[HONG KONG] China's liquor champion's sudden turn to charity will keep weighing down markets. Kweichow Moutai's mediocre third-quarter results shaved nearly US$14 billion from its market cap on Monday, pulling major Chinese indices. The US$309 billion heavyweight is giving handouts to local governments even as state investors dumped shares the company gave them. Given the economic troubles of its home province of Guizhou, there's probably more to come.

Moutai, the country's best known maker of baijiu liquor, reported net profit grew 6.9 per cent from a year earlier to 11.2 billion yuan (S$2.27 billion), disappointing analysts polled by Refinitiv and decelerating from 13.3 per cent for the first half.

More worryingly, Moutai reported that its third-biggest shareholder, a provincially controlled investment vehicle called Guizhou State-Owned Capital Management, aggressively cut its stake, selling over US$4 billion worth of shares.

That stake was already the subject of controversy. In December Moutai's parent gifted the vehicle Moutai stock equivalent to 4 per cent of those outstanding, complying with an order from Guizhou's state assets regulator. Investors didn't like that much, and this quick sale suggests Guizhou really needs the money, and might need more.

Guotai Junan Securities estimates Guizhou's government debt - which does not include off balance-sheet obligations from local financing vehicles - is equivalent to nearly 150 per cent of total local revenue as at 2019. That makes the landlocked south-western region China's most leveraged province.

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Even as borrowing costs lowered elsewhere in the country during the pandemic, an analysis by Moody's Ratings showed rates for Guizhou-based government vehicles actually rose in the second quarter of the year. Fiscal income contracted 5.2 per cent year on year over the first nine months of 2020.

The liquor maker is state-owned, and has long been a bulwark for the local economy. Clearly that's no longer enough. In its latest statement it announced over 800 million yuan in outright donations to help two cities build a sewage treatment plant and a road, respectively.

Until Ant lists, Moutai is the largest listed company in China by market value, and included in many domestic and international indices. That ensures the pain of poor Guizhou, and the cost of Moutai's filial obligation to its local backers, will be widely felt.

Kweichow Moutai said on Oct 26 its net profit grew by 11.2 billion yuan in the third quarter, up 6.9 per cent from a year ago, missing analyst forecasts.

According to the company's earnings report, one of the company's biggest shareholders, Guizhou State-Owned Capital Management, reduced its holdings by nearly 16.8 million shares in the third quarter, raising over 28 billion yuan.

The liquor company said in a separate statement on Oct 26 its board of directors approved two proposals to donate up to 806 million yuan to local governments in its home province to improve the logistical and transportation capacity of the company.


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