China's downturn-proof booze makers hit government wall

Thu Aug 9, 2012 5:04pm EDT
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By Clement Tan and John Ruwitch

HONG KONG/SHANGHAI (Reuters) - The makers of China's fiery liquor baijiu, a pricey, potent drink that is a staple at state dinners, say it inspires poets and can even ward off dementia.

For investors in the largest baijiu makers Kweichow Moutai Co Ltd and Wuliangye Yibin Co Ltd, the appeal is more mundane: the companies paid out huge dividends and raised earnings forecasts when a slowing economy had prompted dozens of Chinese firms to issue profit warnings.

Demand for high-grade liquor at state banquets and premium pricing helped Moutai post an operating profit margin last year that was more than double that of tech giant Apple Inc, the world's most valuable company, Thomson Reuters data shows.

Moutai is even a partner of the Chinese Olympic Committee, pushing out a commemorative brew for the London 2012 games.

But the stellar first-half results that these companies are expected to report this month -- Moutai on Friday and Wuliangye on August 20 -- may mark the high point if Beijing cracks down on lavish baijiu-drenched banquets.

Premier Wen Jiabao pledged in March to ban the use of public funds for luxury items including baijiu, which retails for about $300 per standard bottle and well into the thousands for rare, aged varieties.

"It really depends on how strongly the government would like to execute this policy," said Melinda Zhang, a manager in the consumer and retail practice at the consultancy Booz & Co, who has studied the baijiu sector.

"In the long term, we see the China baijiu market keeping stable growth," she added. "The demand is there. Consumption behavior of businesses and the government will not have significant change."   Continued...

A labourer packages baijiu at the Shanghai Shenxian Rice Winery in Shanghai May 11, 2012. REUTERS/Aly Song