This top China investor only has eyes for one mainland stock

[HONG KONG] Out of more than 3,500 stocks listed in mainland China, this fund manager is only interested in one: Kweichow Moutai Co.

Michael Wan, chief investment officer at China Universal Asset Management (Hong Kong), says investors can't ignore the well-known maker of baijiu liquor, which has already rallied 56 per cent this year - and over 14,000 per cent since its 2001 debut in Shanghai. That's made it China's biggest distiller, and one of the most expensive.

"I'm still comfortable with its valuation. It is very rare a stock can enjoy a margin of as high as almost 90 per cent. You can't ignore this company's ability to turn sales into earnings," said Mr Wan, whose fund has beaten 96 per cent of peers in the past five years and more than doubled the MSCI China Index's gain.

With its soaring returns, Moutai is hardly a rare pick for stock investors. The Guizhou-based company is the world's most profitable distiller, maintaining gross margin at around 90 per cent for at least a decade, according to data compiled by Bloomberg. Mr Wan believes the liquor maker could improve profitability further and says its business model is "irreplaceable".

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"We think Moutai's selling prices still have upside. It may not lift prices very soon, but in the longer run, the upside could be very big," Mr Wan said in an interview in Hong Kong. "Demand for high-end liquor products will keep growing as the pool of wealthy individuals expands in China. It's an ongoing consumption upgrade story."

Moutai's return on book value of invested capital was more than 500 per cent last year, compared with only 16 per cent at Diageo plc, which produces brands including Johnnie Walker and Smirnoff, according to Bloomberg Intelligence.

Top pick

While Mr Wan's mandate allows him to invest up to 30 per cent of his fund in non-Hong Kong stocks, on the mainland he still only has eyes for Moutai, which is tipped by some analysts to be the first Chinese stock to cost 1,000 yuan. To buy more A shares, Mr Wan said he may have to sell some current holdings and he's not planning on doing that for now.

Moutai was up 1.8 per cent at a record high of 924 yuan as of 9.53am in Shanghai on Wednesday.

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Trading at about 26 times forward earnings, Moutai is one of 2019's best-performing large caps in China, where markets are rebounding from last year. The Shanghai Composite Index is up 29 per cent, better than any other major equity gauge worldwide. To Mr Wan, the company's high valuation is also justified by a strong balance sheet that provides solid free cash flow.

"I don't think the market is overly optimistic about Moutai," he said. "You need to think about the quality of its earnings. They are earning cash, not account receivables."

Mr Wan's other top holdings include AIA Group Ltd, Alibaba Group Holding Ltd, Hong Kong Exchanges & Clearing Ltd and Sun Hung Kai Properties Ltd. Moutai is his fourth largest.

BLOOMBERG