Analysis-Ebbing demand for China's favourite firewater adds to debt concerns

By Casey Hall and Sophie Yu

MAOTAI, China (Reuters) - In the Chinese village of Maotai, the local firewater named after the town is not only a key source of income, it's a barometer of the country's battered consumer market and the economic misfortunes of its home province.

In the weeks before Lunar New Year, tourists traditionally flock to the town, nestled in the mountains of the southwestern province of Guizhou, to buy the baijiu, or white spirit, as gifts - this year, those crowds were notably smaller.

The premium spirit made locally by Kweichow Moutai has for decades been a fixture at weddings, business dinners and state functions, but its sales in the past two years have been hit by poor consumer and business confidence.

Victor Shih, a professor of political science at the University of California San Diego, says Moutai's strong cash flows have been "an important part of the strategy to help Guizhou's government repay debt that is constantly coming due".

That means any contraction in Moutai's profit constitutes a problem for the government, which "needs that money to repay their debt and to run the government," he added.

Shanghai-listed Kweichow Moutai is majority-owned by Moutai Group, in turn wholly owned by Guizhou, China's second-most indebted province.

Its contribution to Guizhou's economic development is enormous, not only as a major employer but also as a vehicle for the province to raise revenue and pay down debt.

Long considered a bellwether of Chinese consumer demand, its retail performance has been squeezed in recent years by wider deflationary pressures.

"Before, people would fly from Beijing to buy bottles of Moutai for more than 3,000 yuan ($412) several times per year," said a shopkeeper at one of the many liquor stores lining the river in Maotai village.

"Now you can get a bottle for as little as 1,699 yuan, but the environment is so bad, no-one wants to buy."

Kweichow Moutai, the world's largest alcohol company and until last year China's most valuable listed firm with a market value as high as $400 billion, makes its clear spirit from sorghum and has a special place in the nation's history.

Premier Zhou Enlai toasted U.S. president Richard Nixon with Moutai on his landmark 1972 China visit. 

But a persistent slump in sentiment has taken the wind out of Kweichow Moutai's share price and the price consumers are willing to pay for the product.

The firm's value has fallen by almost half since hitting a record high in 2021, and the market price of a 500 ml bottle of its flagship 53% proof Feitian "Flying Fairy" last year dropped as much as 22% from 2,700 yuan at the start of 2024.

Kweichow Moutai declined an interview request. Guizhou's provincial government did not respond to requests.

TURNAROUND TROUBLES

To be sure, Kweichow Moutai's revenues are not linked to the market price of the product but to the factory gate price its network of distributors pay.

Moutai's 20% bump in factory gate prices for Feitian in late 2023 helped keep revenues above their 15% sales growth target for 2024, according to preliminary results in January. 

But questions remain over how long this growth will last.

Estimates from brokerages and company executives indicate at least 50% of inventory produced by the company over the last decade has not been consumed, but instead held as inventory, often as alternative investments.

Some analysts warn a major inventory sell-off could further impact Moutai's market and share prices. UBS research predicted Feitian's market price could fall far below the 2,000 yuan benchmark by mid-2025.

A fall in prices, in turn, impacts Moutai's luxury brand.

"If you are served Moutai, it means you are important and successful," said George Liu, a private equity manager in Beijing. "If it's cheaper, what's the point of drinking it?"

Moutai also faces demographic challenges, according to Ben Cavender, managing director at Shanghai-based China Market Research Group.

"Baijiu is traditionally an older man's drink and most consumers under the age of 35 really don't have a taste for it," he said.

Chasing younger drinkers, Moutai has collaborated on affordable products like lattes and ice cream, gimmicks that Cavender says haven't had much effect.

Company executives have flagged international expansion for potential growth, though it's unlikely to compensate for a domestic slowdown.

PROVINCIAL GIANT

All of that raises questions about Kweichow Moutai's support for Guizhou.

The company's red, white and blue logo is emblazoned on public works across the province.

In addition to employing more than 30,000, the company accounts for a fifth of the province's tax receipts and 5% of its GDP.

Guizhou has used the company to not only raise revenues and pay down debts but also bail out local highway-builders and contribute to public works such as roads, railways, airports and hospitals.

Four years ago, Moutai Group issued a 15 billion yuan bond to buy an  expressway. It then  transferred for free  a $14 billion stake in the listed company to the Guizhou government.

By the end of 2023, Guizhou's official provincial debt had reached 1.5 trillion yuan, ballooning 26% from the previous year and accounting for 72% of GDP.

That appears to be stabilising, said Yao Yu, founder of credit analysis firm Ratingdog, noting provincial development is mostly dependent on "central transfer payments and local debt issuance" rather than tax revenues from state-owned enterprises like Kweichow Moutai.

The broader question is where Guizhou will find new sources of revenue, given its patchy record in firing up new industries, such as big data centres.

As it stands, according to Guido Cozzi, professor of macroeconomics at the University of St. Gallen, a slowdown in Moutai's growth limits its ability to financially support Guizhou, "potentially leading to higher borrowing costs and an increased risk of default for the province.

($1 = 7.2801 Chinese yuan)

(Reporting by Casey Hall and Sophie Yu. Editing by Anne Marie Roantree and Sam Holmes)