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.

FDI 'Slowdown' in February is Comical

According to an article in the Shanghai Daily today, Foreign Direct Investment into China slowed drastically to a year on year rise of...38.3%! [1] You know times are good when slowing down to 38% growth represents a drastic reduction. Of course, when your main barometer shows inflation charging ahead at 7 - 9%, then you probably need that much growth in investment just to stay ahead.

What really struck me about this article however was the following...

"New foreign-funded firms fell 38.02 percent to 1,454, as investors focused on bigger and more capital-intensive projects, said Li Maoyu, an analyst at the Changjiang Securities." [1]

As a sign of the times, this plainly means that the central government is much more interested in encouraging larger scale projects that not only will help the macroeconomics of China, but also are more easily controlled by the central authorities. Furthermore, it is a sign of the continued changing demographics of China as urbanization continues to steamroll ahead and China's tier-2 and tier-3 cities consolidate and attract millions of migrants.

[1] Wang Yanlin, Shanghai Daily, March 13, 2008, (c) Shanghai Daily Information Company

Tuesday, March 11, 2008

China Transportation - Subway or Rapid Transit?

Earlier this week, the following story about Wuhan's subway system expansion really struck me,

"City In Central China Plans To Spend $40B On Subway System...Wuhan, capital of Hubei province, plans to spend CNY300 billion (US$40 billion) to expand its subway system, Xinhua said. It will be extended from seven to 12 lines with 309 stations by 2015. Once the expansion is finished, 66% of the city's 8.7 million people will be able to find a subway station within 600 meters of their home, Xinhua said." [1]

Certainly for China's mega cities, of which Wuhan truly belongs in the mix, building a massive underground system is in order and will effectively reduce congestion in the years to come. But, what about China's smaller cities? Does the benefit outweigh the cost for cities such as Qingdao, Dalian, and Shenyang? Are there better and cheaper alternatives for Wuxi, Changzhou, Suzhou, and Hangzhou?

Yesterday, I was given a fantastic opportunity to put that in perspective when I visited with Professor Ralph Gakenheimer of the MIT's School of Architecture and Urban Planning. Dr. Gakenheimer specializes in urban planning and transportation planning and brought to my attention an interesting alternative to subway lines that has really caught on in Latin America, Europe, and increasingly the North America and Asia. That system is something called Rapid Bus Transit, or Rapid Transit. What happens in a system like this is that the municipality builds an extra lane exclusively for buses that will stop only at express points in a city or along a highway. To get on and off the bus, you need to have entered similar to a subway where your fare is already paid so that passengers get on and off the bus quickly. Dr. Gakenheimer says average stop times are reduced to 20 seconds and falling.

But, the real advantage to the system is the cost savings it offers a local government. Subway lines cost approximately $100 million per mile in the US (costs for China are unavailable). Rapid transit lanes, however, cost between $10 and $15 million, representing savings of between 85% and 90%. That is a tremendous savings and Professor Gakenheimer indicated that many of China's emerging 2nd and 3rd-tier cities that are dreaming of subway systems would be better suited to start preparing to build these alternative and more cost effective systems.

[1] 3 March 2008, Dow Jones International News (c) 2008 Dow Jones & Company, Inc.