Thursday, March 13, 2008

Maotai: A Consumer Monopoly?

I was particularly struck by an article I read last week that mentioned Maotai liquor's net profit was up over 83% last year. [1] That's a phenomenal year by the measure of any mature growth stage company, and it is strange to see beverage companies produce such amazing results.  

Given that I am a huge fan of the Oracle of Omaha, Mr. Warren Buffet, I began to wonder, would Buffet ever consider investing in this company?  What I am really interested in is whether or not Buffet would consider Maotai Liquor a consumer monopoly?  

I believe it is and here is why:

With rare exception, no matter what liquor shop or decent restaurant you go to in China, the vendor must provide certain brands off baijiu (sorghum wine - Chinese vodka/whisky).  It is my belief that one of those two is Maotai.  (The other brand in my opinion is Wuliangye).  

An extension of this means that Maotai will be able to dictate to its vendors price increases, instead of the vendors putting pressure on Maotai that they will cease to carry Maotai unless they lower prices.  Evidence of that came in the same article..."Kweichow Maotai has raised ex-factory prices of it s products by an average of 20% from January 11." [1]  Again, the distributors and retailers are really helpless to rises in factory prices of Maotai because they have to carry the brand or they will lose patrons.

Next, how recognizable is the brand?  Well, Maotai liquor is not only recognized among the Chinese domestically, but I would say that millions of foreigners from an earlier generation could even tell you that Mao Zedong's "official" drink was Maotai.  Despite that bit of infamy, Maotai is definitely one of the most widely recognized brands in all of China.

Finally, can Maotai lose this positioning?  Can management "screw things up?"  I doubt it.  Again, typical of most consumer monopolies, once you attain a certain position in the market, it is very difficult to screw things up.  Even if millions of Chinese started overdosing on Maotai at local restaurants, I simply cannot see any way the Chinese government would let them go under.  Remember, the vast majority of Maotai is being consumed in China.  Thus, despite the international brand recognition, the baijiu is being consumed domestically, so any problems that may arise would be considered a "China" problem and not subject to outside political influences.  

This means that for those fundamental investors, do your homework and research Maotai's traditional PE ratios and return on equity numbers.  Then, sit back and wait for the market to hammer its share price, and then jump in and hold on for the long term.




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