Moutai's Investment Thesis

Overview

Kweichou Moutai is a Chinese distillery that makes baijiu, a traditional spirit distilled from sorghum, wheat, and water. It has a narrow product line. The flagship, Feitian Moutai, is a high-end spirit and accounts for roughly 86% of revenue. The remainder comes from a growing line of lower-priced Series products, including Moutai 1935 and Prince Wine. All of the company’s liquor is made in and around the town of Moutai, which hosts unique microbes that make the taste not replicable anywhere else in the world.

Drinking is a habit in every culture throughout human history. In ancient China, drinking alcohol is tied to ceremonies and lawmaking, as part of sacred events and rituals for setting codes of conduct. It has also inspired poets and painters. Today, drinking continues to be a medium of social exchange, a cultural symbol, and a companion to food. In social settings, it is used as an ice breaker, to signal goodwill and build trust.

Prior to China entering the WTO, baijiu accounted for most of Chinese people’s alcohol consumption. It continues to be one of the main types of alcohol consumed today but faces competition with other types of beverages. Moutai, as the leading baijiu maker, is deeply engrained in the Chinese culture. Its flagship product, “Feitian”, has enjoyed strong brand loyalty for its distinct flavor and mild hangover effects. My investment thesis assumes these habits, and Moutai’s place within them, will continue.

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The Opportunity

Moutai’s stock price declined 41% peak to trough over the past 5 years. The Company currently trades at 20x LTM P/E, which is below historical average of 25x–30x. At the current price of ~RMB $1,400/share, this represents a 25–35% discount to intrinsic value based on a 10% discount rate, long-term terminal earnings growth rate of 5%¹ and conservative annualized earnings growth profile of ~9–10% over the next 10 years (6% growth in FY26, 8% in FY27, ~15% recovery in FY28–FY30, and 10% in FY31–FY35). This is an attractive entry point for long-term investors with a 10+ year holding period.

The current valuation reflects several market fears addressed below.

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Fear 1: Demand softness caused by the alcohol ban and real estate bubble bursting will take at least 3–5 years to pass

Since 2022, China has experienced a recession driven by the bursting of its real estate bubble. This led to bankruptcies of real estate developers and fragility in the banking sector. Since the 2012–2013 government crackdown on alcohol consumption, the business sector became the primary source of baijiu consumption, particularly for Moutai. The real estate and banking downturn resulted in fewer business meetings and therefore lower Moutai consumption.

To make matters worse, in mid-2025, restrictions were placed on alcohol consumption for civil servants during workdays, resulting in even less usage of liquor over lunch and dinner meetings.

Our View

We believe that this downturn is cyclical and does not impair long-term fundamentals. In fact, having the bubble burst now is beneficial as it allows the economy to reset for long-term, more sustainable growth.

While we have no way to predict how long this cycle is going to be, we gain comfort from the fact that Moutai’s large distributors continue to be profitable as a group. These distributors purchase Feitian at RMB 1,196 ex-factory and sell at RMB 1,500+ retail (albeit down from RMB 2,700 at peak). The gap between ex-factory price and retail price continues to provide cushion for the distributors to weather through the recession.

Moutai also has a track record of supporting distributors during difficult periods. If retail prices were to ever drop below ex-factory price levels, we expect Moutai to prioritize the health of its distribution system by providing concessions and channel support.

Most importantly, premium baijiu has an attractive feature: it does not become obsolete over time. In fact, aged liquor tastes better and can sell at better prices in the future.

In late 2025, we are seeing a recovery in high-end consumer demand in China with companies like Apple and LVMH’s China sales increasing, which could be leading indicators of a broader consumption recovery.

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Fear 2: Feitian has been used as a financial asset; inventory dumping will permanently destroy demand

The market fears that Feitian has partly been bought and stored as a financial asset similar to gold. Falling prices may trigger inventory dumping, creating a downward spiral on price due to excess inventory.

Our View

Speculative inventory amplifies cycles but does not change long-term demand. We believe speculative demand exists at the margin, but it is not the foundation of Moutai’s business.

Moutai’s demand comes from its premium quality and status symbol. Penetration remains low at only 2% of total baijiu production volume.

Moutai experienced something similar during the 2013–2015 anti-corruption campaign where retail prices fell sharply and inventories flooded the market. Anecdotally, the Company went around the town of Moutai offering anyone willing to purchase bottles at discounted prices. Yet Moutai continues to be the #1 player today with strong demand levels and prices recovering from the trough.

Permanent impairment would require sustained retail prices below ex-factory levels and loss of social and ceremonial relevance — conditions we do not observe.

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Fear 3: Long-term demand will continue to experience structural decline

Long-term demand will continue to experience structural decline driven by (i) declining birth rate which translates into a smaller addressable market of people available to drink alcohol and baijiu, (ii) younger generations preferring other types of alcohol or beverages to baijiu, and (iii) people being more health conscious, drinking less alcohol in general.

Our View

Population decline does not necessarily translate to declining drinking population. WHO statistics indicate that a large portion of Chinese adults do not drink — only 40–45% of adults drink in China (vs. 70–72% in the US) and the drinking population is heavily skewed towards men (55–60% of men drink while only 10–20% of women drink). Of those who drink, ~40% are heavy drinkers mostly attributable to banquet / toasting culture, relationship-building norms, and social and business drinking culture among men. The alcohol consumption per person for the drinking population is on par with other countries. This leads us to believe that a declining overall population does not automatically translate into a proportionate decline in drinkers. Additionally, the Chinese government is focused on various incentives that help support family building.

Concerns about younger generations preferring foreign liquor also surfaced during China’s WTO entry in the early 2000s. Baijiu consumption reached multi-decade lows around 2003 but recovered. As people age, their preference for baijiu increases. This is because people’s taste buds usually become duller and require more spice to gain satisfaction.

By looking at the multi-decade alcohol production pattern below, it is possible that baijiu industry volume is not in structural decline but exhibits cyclicality over multiple decades.

We believe there is a base level of demand for baijiu as dietary habit is hard to change. The traditional Chinese cuisine, often heavy in salt and spice, pairs naturally with baijiu. In many regions, baijiu remains integral to festivals and family gatherings. The baijiu market has also been innovative with lower degree (42 or 39 degree) products or sweeter flavors to accommodate younger generations and regions where food is less heavy.

Finally, even if all of the above industry trends continue into the future, we gain comfort from the fact that Moutai accounts for only 2% of baijiu production volume. We expect people who are more health conscious to move up in quality of the liquor they are drinking. Moutai’s quality and its less hangover effects will continue to support demand.

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Investment Thesis

The ultra-premium baijiu market continues to enjoy high barriers to entry and Moutai’s #1 position is hard to displace

We expect Moutai’s moat to get stronger with time through branding and history. The premium baijiu market is dominated by the top 4 brands and has seen no new national entrants since the early 2000s.

New brands that are popular with Gen Z, such as Jiang Xiao Bai, are priced much lower and do not directly compete with Moutai.

Moutai’s brand equity was built through 50+ years of state and diplomatic usage — “free marketing” at the highest symbolic level. It was used in high-stakes political events such as international diplomatic meetings, and then in government and business meetings post-2000s.

Moutai’s brand meaning is passed down through the collective memories of three generations of Chinese people through social rituals, gifting practices, and cultural education. As time passes, Moutai’s brand equity increases and cannot be competed away by new brands with no history. Its stringent quality control process ensures consistency of taste and quality, which continues to strengthen brand equity.

Consumption premiumization trends will continue over the long-term, supported by a rising middle class

We expect that as China comes out of its most recent recession, consumer purchasing power and confidence will resume. As China continues to experience growth in the middle class, people will continue to move towards premiumization.

Health-conscious consumers drink less volume but trade up in quality. People drinking high quality liquor such as Moutai and Wuliangye tend to experience fewer hangover symptoms the next day.

We expect Moutai to continue gaining share in the baijiu industry

Even if baijiu industry sales volume never recovers as anticipated above, this does not change our investment thesis in Moutai.

Sauce-aroma baijiu is an acquired taste with higher retention and repeat purchase rates than other types of baijiu once consumers cross the preference threshold. Moutai has a core circle of fans who enjoy the taste of sauce-aroma baijiu and are devoted to the high quality of Feitian products. This provides consistent support for demand.

Moutai’s flagship Feitian (and more premium) products account for only ~2% of overall baijiu industry volume. ~47K tons of Feitian are sold every year — 1 in every 13 people drink 1 bottle of Moutai per year, much lower than the average of 10–14 bottles per adult per year. Over the next 10 years, we expect demand for Feitian to continue to outstrip supply.

Production expansion is inherently constrained by fermentation, aging, and blending requirements that cannot be accelerated without compromising quality. Demand for Moutai has consistently outpaced supply over the years, as indicated by the wide gap between the retail price of RMB 2,500 and the ex-factory price of RMB 1,169. On iMoutai, where people enter a ballot to purchase a bottle of 100ml Feitian, the success rate is only ~3% currently.

We expect demand for Feitian to exceed supply over the next 10 years and that Moutai’s volume growth will continue to come from its ability to expand production — a supply-side constraint. Anecdotally, many consumers chose not to drink Moutai not because they don’t want to, but because they are often not certain whether the product is real or fake. This suggests a lot of untapped and unmet demand in the marketplace.

Recent shift to DTC channels can unleash pricing power historically restricted by the distributor channel

The expansion of authenticated direct-to-consumer channels will continue to unleash demand from consumers who used to shy away from Moutai due to counterfeiting concerns and lack of access to reliable distributors.

We believe Moutai will continue to benefit from higher than GDP-level pricing power with margin of safety coming from (i) the large gap between retail price (RMB 1,500+) and ex-factory price (RMB 1,196) and (ii) structural shift to direct channels, which carry higher margins than the distributor channel.

Moutai has been increasing ex-factory price at ~5% historically while enjoying retail pricing increase at ~10%+. Series liquor such as Moutai 1935 and Prince Wine will provide revenue support in the case of a temporary consumer downgrade cycle. We expect Moutai’s recent push of its flagship 500ml Feitian product to further shift its revenue and profit mix to direct channels, thereby capturing real market pricing versus leaving those profits for distributors.

Moutai has a shareholder-friendly capital allocation policy and experienced improvements in corporate governance

Moutai is financially attractive, generating consistently high ROIC (~20%+) since its IPO in 1998 and enjoying high and improving net profit margins (~40%+) — economics mirroring that of a cash printing machine.

The Company is also shareholder conscious, prioritizing returns through a stable dividend policy. Moutai returned RMB 303B to shareholders via dividends since its IPO in 2000, targeting ~75% of free cash flow over the next 3 years. The Company has also initiated a stock repurchase program of RMB 6B at prices below RMB 1,700/share.

My research visits in the town of Moutai also indicated that corporate governance has improved since former CEO Yuan Ren Guo came in, including the tightening of the raw material supply chain and reduced bribery for friends and family to gain employment at Moutai. Prior CEO Zhang De Qin has a track record of operating Xi Wine Company, which increased its market share to 20% in regional markets under his leadership.