China’s Most Valuable Listed Company Draws Scrutiny for Corruption Ties

Chinese workers arrange bottles of locally made- baijiu liquor in Maotai, Guizhou province, China, on Sept. 22, 2016. Kevin Frayer/Getty Images

News Analysis

The most valuable publicly traded company in the United States—Apple Inc.—attracts almost universal admiration for its iconic brand, resiliency, and stock market performance.

Not so for the most valued Chinese-listed company, Kweichow Moutai, whose 2.1 trillion yuan ($301 billion) market capitalization shot past the No. 2 Chinese-listed company, Industrial & Commercial Bank of China, in June.

Being China’s—as well as the world’s—most valuable liquor distiller, Moutai is generally admired as much as it is scorned.

Kweichow Moutai’s most recent quarter (which ended June 30) saw its sales growth slow to five-year lows as the company continued to battle accusations that it benefits from the Chinese Communist Party (CCP)’s rampant corruption.

First, what is Kweichow Moutai? Among casual Western investors, it’s one of the least well-known of China’s major state-owned companies. Partially listed on the Shanghai Stock Exchange, Kweichow Moutai is known for producing maotai, a popular baijiu—a colorless Chinese liquor that’s typically 30–60 percent alcohol. Maotai is a regional icon in the southwestern province of Guizhou.

But while the liquor isn’t especially enjoyable to drink—it has a fiery and savory taste—it’s the preferred alcoholic beverage of former CCP leader Mao Zedong.

The company’s stock has become a favorable holding for institutional investors in the West. It is well-covered by equity research analysts at Wall Street banks. And since the beginning of the year, Kweichow Moutai shares have risen 42 percent, far outpacing the 8.5 percent gain of the Shanghai Composite Index.

Kweichow Moutai’s eye-watering valuation as a distiller seems especially rich compared to its Western peers. Despite a relatively modest quarterly revenue figure of $2.9 billion—which is less than one-third that of Anheuser-Busch InBev’s—Kweichow Moutai’s market capitalization is greater than the combined value of AB InBev, Heineken, and Diageo.

Domestic Backlash

Part of Kweichow Moutai’s appeal to investors is its popularity among wealthy Chinese and supposed resiliency during the CCP virus pandemic.

But the company’s status among the Chinese elite has also garnered it scorn from the average Chinese. The more that its stock and liquor price soar, the greater the apparent public backlash.

Top-end bottles of maotai can fetch thousands to tens of thousands of dollars at auction. Maotai baijiu is one of the most popular gifts of bribery within the CCP, since it’s seen as more subtle than bringing a suitcase of cash.

On July 16, Kweichow Moutai shares tumbled as much as 8.4 percent after a social media platform under People’s Daily—the CCP’s mouthpiece newspaper—questioned whether the company’s skyrocketing stock price is linked to rampant corruption and graft.

The platform “Learning Group” (Xuexi Xiaozu in Chinese) published an article, titled “Moutai smells bad. Who’s footing the bill?” in which the author notes maotai’s role in business and high-level political dealings, and reminds readers that the company’s former chairman, Yuan Renguo, was sacked for corruption.

Yuan, who headed the company from 2011–2018, was removed from his post and dismissed from the CCP for taking “huge amount of bribes” and other “severe violations of discipline and law,” according to a 2019 report by Caixin, a Chinese business magazine. Thirteen other company executives were also under investigation.

It’s particularly ironic that the most valuable company in China is also a name associated with graft and corruption.

Slowing Revenues and Profits Growth Temporary?

During its most recent quarter, Kweichow Moutai’s sales growth of 9.5 percent and net profit growth of 9 percent were both below market expectations, while top-line growth was the slowest since 2015.

But analysts say those results are still decent given that the CCP virus pandemic has affected production and reduced demand.

China’s high-income households are still drawn to luxury goods such as maotai liquor, despite the pandemic.

“The purchasing power of wealthier families has been less affected by the pandemic due to their large asset base,” Fitch Ratings observed in a note, pointing out that “1Q20 sales of high-end liquor brands, such as Kweichow Moutai and Wuliangye, rose by 13 percent and 15 percent year-on-year, respectively, while sales of low-end names declined.”

While profits and sales were below expectations, 2020 estimates were still on track, Morgan Stanley analysts wrote in a note to clients on July 28.

“Distributors will start replenishment orders in August for 4Q, on track with the full-year plan.”