Guizhou Moutai Company (贵州茅台), the producer of the most luxurious Chinese liquor Moutai Jiu (茅台酒), just bought a real estate company and annouced its plan to enter the business of real estate development. Why would it do that? Moutai Jiu has such a unique status in the history of Chinese alcohol that it seldom needs to worry about insufficient demand, but right now many real estate developers can hardly get rid of their huge stock of unsold apartments. Also Moutai Jiu’s profit margin is around 80% while that of most real estate projects is below 30%. But Moutai is a state-owned enterprises, its priority is not really profit. The local government of Guizhou Province (贵州省) wants it to lift up Guizhou’s GDP.Moutai Jiu has been an icon of Chinese alcohol since the Qing Dynasty and its unique flavor is tied to the particular water, soil, and climate of its origin–Moutai Town of Guizhou. So Moutai Jiu is perceived as scarce and precious by Chinese consumers. The value of a bottle of Moutai Jiu actually increases with the amount of time it is stored. A bottle of Moutai from 1953 was just bought at 1.5 million yuan at an auction in Jan. 2012. So Moutai Jiu is also a store of value for some people. No wonder the stock of Moutai Company is Chinese value investors’ favorite. But these value investors should worry about Moutai’s recent attempt to enter fields like real estate, where it has little experience.
Some Chinese investors call Moutai the “Apple” of China’s stock market. Both Apple and Moutai have products that remain desirable despite their high prices, and both companies have loads of cash on their accounts. But while Apple decided to use its extra cash to pay dividends and buy back stocks, Moutai follows the local government’s order and invest away its capital with little consideration about return.The Major of Guizhou Province, Zhao Kezhi (赵克志), actually put it into his annual work report that he wants Moutai’s annual income to reach 50 billion yuan in 3 years, more than two times of Moutai’s sales in 2011. But there is a limit to the amount of Moutai Jiu that can be produced every year, and if its supply can be easily doubled, it will cease to be the scarce and luxurious commodity in people’s eyes. So digressing into other industries is an inevitable choice if Moutai Company wants to reach the goal that government officials set for it.
But why real estate? It’s probably because in China people assume it’s a market in which the only barrier for entry is capital. In the past several years’ bull market, developers don’t need to know about quality, design or service, whatever they build would be sold out to buyers who think they will not be able to afford it ever if they don’t buy it now.
A similar story happened to Moutai’s rival, Wuliangye (五粮液), another leading liquor company. Under the influence of the government of Sichuan, Wuliangye launched projects in computer chip production, medicine, and finance, all of which failed hopelessly.
I wrote about the fact that a large percentage of Chinese companies are involved in real estate development, so Moutai’s action is not really a surprise. But this news warned us that we should never under-estimate the impact of the ambition or vanity of government officials on how state-owned enterprises allocate their capital and resources.