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By Chong Koh Ping and Joanne Chiu 

Kweichow Moutai Co., the best-known distiller of the fiery Chinese spirit baijiu, has risen to a market value of more than half a trillion dollars, making it the most visible symbol of investor euphoria in China.

Moutai shares closed at a record high Wednesday, on the last trading day before a weeklong Lunar New Year holiday. They have more than doubled in the past 12 months, gaining more than 30% since the start of 2021.

The rally has turned the liquor company into one of the world's most valuable consumer-goods companies, outstripping giants such as Procter & Gamble Co., Nestlé SA and LVMH Moët Hennessy Louis Vuitton SE.

It is now roughly as important to the Chinese market as Apple Inc. is in the U.S., accounting for 7.3% of the Shanghai Composite Index while Apple makes up about 6.7% of the S&P 500. China's biggest technology companies, Tencent Holdings Ltd. and Alibaba Group Holding Ltd., aren't listed on the mainland.

Shanghai-listed Moutai makes an unlikely bedfellow for these Western blue chips. The company is majority owned by the local government in the southwestern Chinese province of Guizhou and its chairman, Gao Weidong, was the regional government's top transport official before assuming his post last year. The best-compensated executive listed in its 2019 annual report received the equivalent of about $130,500.

Compared with sluggish state-owned enterprises in areas such as banking or oil, Moutai boasts more attractive growth prospects. Analysts polled by FactSet expect net income to grow by 11.5% in 2020 and around 19% annually for the next two years.

It is also highly profitable: analysts forecast it will earn $8.5 billion in net income for 2021, on revenue of $17.6 billion, FactSet polling shows. In contrast LVMH, for example, is expected to earn $9.3 billion from revenues of $67.8 billion for the same calendar year.

Investors are willing to pay handsomely for that growth. Moutai stock closed at 2,601 yuan, the equivalent of $403.34, on Wednesday. It trades on 55 times expected earnings for the next 12 months, FactSet data shows, compared with an average of 26 times over the last five years.

Foreigners have substantial holdings of Moutai, which only reports financial results in Chinese. They hold about 8% of the stock -- worth $40 billion at current prices -- through the Stock Connect program, data from the Hong Kong stock exchange shows. U.S. manager Capital Group is among Moutai's backers.

Enthusiasts point to the scarcity value of Moutai's namesake baijiu, since production is limited, and the growing disposable incomes of China's middle class. Premium baijiu is a status symbol and is bought for gifts, weddings, parties and investment.

"Chinese consumers are drinking less overall but drinking better products. Moutai is the key beneficiary of this premiumization process," said Wei Wei Chua, a portfolio manager at Mirae Asset Global Investments in Hong Kong. Mr. Chua said he had started investing in Moutai shares a couple of years ago, and believed price increases this year could support its earnings growth.

Individual investors dominate trading in Shanghai and Shenzhen, which in the past has made China's onshore markets prone to boom-and-bust cycles. A wave of money has washed into the markets in recent months as many of these retail investors have backed new mutual funds.

William Lo, a director at SilkyWater Asset Management in Hong Kong, said valuations for many Chinese stocks were frothy. But he said investors looking for fast-growing companies with strong brands in China had no choice but to invest in companies such as Moutai.

New investors were buying into Moutai based on premiumization, a story that hasn't changed much in three years, said Allen Cheng, an equity analyst at Morningstar in Singapore.

Mr. Cheng reckons the company will lift production capacity about 10% annually for the next three years. He said that could end the supply shortages that have helped lift prices for Moutai's drinks and its shares.

When it comes to the stock price, Mr. Cheng cautioned: "This is not a pure fundamental story that we're talking about. But it's also hard to judge where the peak is."

Write to Chong Koh Ping at chong.kohping@wsj.com and Joanne Chiu at joanne.chiu@wsj.com

(END) Dow Jones Newswires

February 10, 2021 08:49 ET (13:49 GMT)

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