EF5042 –Corporate Finance Group Project

Case Analysis: Kweichow Moutai Co., Ltd

By

Group G

HANG Yujia 57372408

LIANG Chuyi 57432919
LIU Yishan 57397894
WANG Yueyan 57543564
WANG Yufei 57661046
 Executive Summary

Kweichow Moutai is one of the most valuable stocks for investing in China. Its stock
price consistently ranks first among A-shares, attracting many investors to hold it for
a long time. This paper takes Kweichow Moutai as the research object, selects its
official website financial reports from 2001-2017, and analyzes its financial capacity
through the perspectives of capital structure, cash flow, capital rising policy and
dividend policy. It is found that Moutai has a strong operating position and cash flow,
and keeps dividend policy of high cash dividends. However, Moutai has a low capital
utilization and basically does not take advantage of financial leverage. Subsequently,
this paper selects two enterprises in the same liquor industry for comparison, and
based on the analysis results, finds its adjustment direction and proposes relevant
optimization measures, so as to promote the future development of the enterprise.
1. Company Background

1.1 Historical and Background Information

Kweichow Moutai Co., Ltd (600519.SS) is China’s leading liquor company, which
operates in the production and sales of Moutai liquor and a series of liquor products. It
is the largest beverage company in the company by market cap, with $276.51 Billion
as of November 2022. In 2001, the company’s A shares were listed on the Shanghai
Stock Exchange. The stock share price rose from the issue price of 31.39 yuan to the
highest intraday price of 2586.91 yuan in 2021.
According to the Kweichow Moutai annual financial report 2021, Moutai’s total
operating revenue amounted to 106.2 billion yuan (+ 11.2% YoY), and net profit
attributable to owners of the parent was 52.46 billion yuan (+ 11.3% YoY). The
growth of performance is closely related to the recent promotion channel. "Moutai has
been carrying out brand innovation in the near future. In May 2022, the official e-
commerce app "i Moutai" was launched to empower the new retail and improve direct
marketing channels.

1.2 Product Market

Moutai, called "the national liquor" in China, is the most revered Chinese liquor.
“Scarcity” is the most competitive advantage of Moutai in the liquor industry. Moutai
Town's production materials, water source, climate, and other environmental factors
make Moutai liquor brewing irreplaceable. In addition, the production cycle and
adherence to traditional technology limit the capacity of Moutai liquor. In the long
run, the scarcity of Moutai liquor is unchangeable, which enables Kweichow Moutai
to have a strong pricing right and moat. Therefore, Moutai, with its high quality, has
created a trustworthy and noble brand image, which is different from other high-end
liquor in China. The competitive advantage of such intangible assets has become the
moat of Moutai, which keeps Kweichow Moutai at a high rate of return on net assets.
Apart from the most valuable brand itself, macro-economy, consumption upgrading,
and the industry concentration with the development of the liquor industry have
contributed to the constant growth of Moutai’s sales revenue since 2015, and the net
profit 10y CAGR reached 14.8%. However, In 2022, the sales growth rate of Moutai
has gradually slowed down. Kweichow Moutai has to face some pressure and risks,
such as recession, underconsumption, and inadequate production capacity of the base
liquor. However, with management reform, product upgrading, capacity expansion,
and channel development, Moutai's performance is expected to achieve steady growth
in the near future.

1.3 Ownership structure and organization structure

The ownership structure is presented as the pie chart below. Its biggest stakeholder is
Kweichow Moutai Company Limited, holding 54% shares, followed by HKSCC
Nominees Limited (7.31%) and Guizhou State owned Capital Operation Co., Ltd
(4.54%). These companies are 3 biggest stakeholders of Kweichow Moutai Company
Limited, and the ranking has never changed since 2019.

The pie chart of ownership structure of Kweichow Moutai Company Limited (2022)

Kweichow Moutai Company Limited has more than 30 subsidiaries, mainly including
Kweichow Moutai Distillery (Group) Xi Liquor Co., Ltd, Kweichow Moutai
Distillery (Group) Changli Wine Industry Co., Ltd, Kweichow Moutai Brewery
(Group) Co., Ltd and so on. According to ‘Major customers and suppliers’ section in
ANNUAL REPORT 2021 of Kweichow Moutai Company Limited, the top five
customers constitute a total proceeds of CNY 14,982.74 million, accounting for
14.13%of annual total proceeds; the total acquisition cost paid to the five suppliers is
CNY 2,917.35 million, accounting for 43.33%of annual total acquisition cost.
The company has hired Ding Xiongjun as Chairman and director since September 24,
2021, without any stake of the firm.

2. Capital Structure Policies

2.1 Capital Structure

1) Balance sheet
This table extracts key data from Moutai's balance sheet disclosed from 2017-2021
for analysis, calculates changes in major items such as money funds, accounts
receivable, inventory goods, and current liabilities, and compares them with the
previous year's data to arrive at the changes in the balance sheet, as shown in the
table. Analyzing the table data, the following conclusions can be drawn.
a. Cash and cash equivalents. from 2017-2018, Moutai's monetary funds continued to
increase, and the increase was large, reaching 112.1 billion yuan in 2018. The reason
is that when enterprises carry out production and operation activities, part of the
business is settled through bills, and customers need to deposit certain deposits with
banks. the rapid decrease in monetary funds held by the company during 2018-2021 is
mainly caused by the enterprises' purchase and construction of fixed assets, intangible
assets and other long-term assets. Over the past five years, Moutai's better sales
performance has led to a continuous increase in the amount of monetary funds
b. Account and bill receivable. 2017-2020 Accounts Receivable is mainly reflected in
notes receivable, although there are increases and decreases, but the increase is greater
compared to the decrease, indicating that the company has strengthened management
control to reduce bad debt losses
c. Inventories. Because the production and operation has been better, Moutai's
inventory goods show an increasing trend. 2021 the percentage increase in the
company's inventory has increased significantly compared to 2017
d. Liabilities. Total liabilities are mainly expressed as current liabilities, indicating
that enterprises have stronger liquidity, less pressure to repay debts and better
liquidity of assets
2) Liability Structure

The above chart shows that the proportion of current liabilities was basically stable.
Overall, total liabilities are mainly expressed as current liabilities, remaining above
98.5% every year, and the total liabilities are basically dominated by current
liabilities, indicating that enterprises have stronger liquidity, less pressure to repay
debts and better liquidity of assets

From the trend line on the chart, we can know that Moutai’s gearing ratio is generally
decreasing. Overall, Moutai's debt is too low, far below the appropriate ratio of 40-
60%. In theory, a gearing ratio between 50%-60% is ideal, too high means increased
financial risk and the possibility of a debt crisis, which in turn leads to a credit crisis.
A low gearing ratio means that the company does not make full use of its financial
leverage and does not realize the "tax-deductible effect of interest".
3) Conclusion
The analysis shows that Moutai has been holding a large amount of monetary funds in
recent years, resulting in redundant funds and a relatively single investment channel,
which has not brought into play the economic and social benefits that funds should
have, and increased the opportunity cost of the enterprise.
In order to improve the core competitiveness of enterprises, enterprises should turn
assets into capital, reduce idle capital and let capital appreciation occur in the flow. In
capital operation, we should be brave to innovate, change the way of operation,
change from managing assets to managing capital, and ensure the value of state-
owned assets is preserved and increased

2.2 Cash Flow Analysis

1) Cash flow from operating activities
From 2017 to 2021, Guizhou Moutai's net cash flow from operating activities will be
22.15 billion yuan, 41.39 billion yuan, 45.21 billion yuan, 51.67 billion yuan, and
64.03 billion yuan, respectively, gradually increasing, with cash inflows from
operating activities greater than cash outflows from the company's need to maintain
daily operations, with the ability to repay the debt to reduce the interest burden,
expand the company's production and operation scale or moderately It has the ability
to repay debts to reduce the interest burden, expand the scale of production and
operation or increase long-term investment moderately.
 Components of cash inflow from operat-
ing activities
100%
80%
60%
90.65% 94.29% 95.51% 94.32% 95.62%
40%
20%
0%
2021 2020 2019 2018 2017

cash from selling commodities or offering labor

others

Data source: Choice

Guizhou Moutai's excellent cash flow inflow from operating activities for 2017-2021
was mainly due to the best-selling of its product - Moutai wine, with cash inflows
from merchandise sales accounting for over 90% of the total ， which indicates that
Guizhou Moutai's product sales are excellent. 2018 cash flow showed a significant
increase, up 32.62% year-on-year.
The main cash outflow item in operating activities is the various taxes and fees paid,
which accounted for more than half. The various tax liabilities paid from 2017-2021
accounted for 66.00%, 67.31%, 73.46%, 66.79%, and 51.01% of the annual cash
outflow, respectively.
Overall, Guizhou Moutai's operating activities from 2017-2021 brought a large
amount of positive cash flow to Guizhou Moutai, significantly reducing the
enterprise's financing needs, operating costs, and risks. It is expected to remain on a
stable growth trend in the future.
2) Cash flow from investing activities
Cash flows from investing activities of Guizhou Moutai are mainly concentrated in
fixed, intangible, and other long-term assets. The amount of cash received from other
items was relatively small. The cash flows received from other investing activities
related to other items are less and show a decreasing trend. There is too much
investment in fixed assets, and most of the investment in fixed assets is in buildings
and structures.
3) Cash flow from financing activities
The net cash outflow from financing activities is negative from 2017 to 2021, with the
main outflow items being cash paid for distributing dividends, profits, or interest
payments.

2.3 Operating Cash Flow Quality Analysis

1) Ability to attract funds from sales
 Cash received from sales of goods and
services/Operating Income
1.1444
1.13 1.1236 1.1276
1.1118
1.08
1.06
1.03

0.98
2021 2020 2019 2018 2017

Cash received from sales of goods and services/Operating Income

Data source: Choice

The stable sales collection ratio from 2017 to 2021, all greater than 1, indicates that
the higher the ratio of cash received when Guizhou Moutai achieves operating
revenue, the lower the ratio of accounts receivable and the strong ability of sales to
attract funds.
2) Quality of operating income

Cash flow generated from investing activi-

ties Net Amount/Operating Income
70.00%
60.00% 60.30%
54.44% 56.20%
50.00% 52.92%
46.12%
40.00% 40.44% 38.05%
30.00% 30.77% 32.35%
25.64%
20.00%
10.00%
0.00%
2021 2020 2019 2018 2017

MOUTai Wuliangye

Data source: Choice

The higher the quality of operating income, the stronger the ability of a company to
create net cash inflows through sales revenue. Wuliangye and Guizhou Moutai were
selected for the same industry comparison, and the graph shows that Guizhou
Moutai's operating income gold content is significantly higher than that of Wuliangye.
3) Implication
Guizhou Moutai has a strong operating position and cash flow, which continues to
grow. It has few external investments, long-term loans, and temporary liabilities, not
to mention financial leverage to reduce the company's cost of capital ratio. As a result,
the huge amount of capital accumulated from operating activities has yet to find good
opportunities for external investment. A large amount of capital exists in the form of
currency, which provides an objective basis for paying high cash dividends over the
years.
2.4 Comparison and Suggestion
1) Comparison
The great success of Kweichow Moutai is challenging to replicate. Its financial
structure stems from its strong capital and unique product features.
In this part, we compare it with its competitors in the same liquor industry to find the
possible direction of its financial policy adjustment. After considering the company's
size and brand value, the following companies' data is selected, wuliangye and
luzhoulaojiao, for comparison.
Kweichow Wuliangye Luzhou Laojiao
Moutai
Solvency Debt 22.81 25.23 34.89
Ratio（%）
Equity Multiple 1.33 1.34 1.54
Development Revenue Growth 12.34 18.26 16.50
Capacity Rate(%)
Profitability ROE（%） 29.90 25.30 31.13
EPS 41.76 6.02 5.43
Common Stock 12.56 38.8 14.7
Number

(1) Solvency
This table shows that all three liquor companies have a low debt ratio, but Moutai's is
still the lowest. According to the report, in 2021, the overall debt ratio of the liquor
industry is 28.9%, so it can be concluded that the industry has the characteristic of not
relying on debt to drive financial leverage.
(2) Development Capacity
Moutai's revenue growth rate is the lowest among the three, but the growth rate of
12% is still very good. Moutai has maintained a long-term growth rate of 10%-30%
for a decade, showing its sustainable development capacity.
(3) Profitability
Moutai's ROE is in the middle of the three companies, and overall, Moutai has a high
ROE value, which means it effectively uses shareholders' funds.
Moutai's EPS is much higher than the other two companies. In fact, it is also the
highest among all shangshen A-shares, far exceeding the second place at 20.4. EPS is
the ratio of total profit after tax to total common equity. Therefore due to its
definition, it can be analyzed from two aspects.
On the one hand, Moutai has a very high net profit; on the other hand, the total
number of Moutai's Common stock is relatively low, at 126 billion shares. Moutai
offered 75 million shares to raise funds when it went public in 2003 and has not raised
additional shares since then.
The remaining two companies have raised additional capital after their IPOs. Also,
their common stock number has increased significantly due to their dividend policy.
2) Suggestion
It can be seen from Moutai's asset structure that it has a large number of current assets
and no bank loans, so it has a low capital utilization and does not take advantage of
financial leverage. Also,if there is a financing need ， it can be easily met through
internal financing. Its financial policy is very conservative and has a strop g tendency
to be risk-averse.
According to the above comparison and conclusion, some suggestions are offered for
future improvement.
(1) Try more investment activities like long-term investments, mergers and
acquisitions.
(2) Optimize capital structure, broaden financing channels, and increase debt ratio
appropriately.
(3) Improve the shareholding structure. Moutai's first largest shareholder holds nearly
70% of the shares, so the rights of small shareholders may be damaged.
(4) Adhere to the dividend policy of high cash dividends.

3. Capital Raising Policies

(1) IPO in 2001

In 2001, 71.5 million shares of common stock were listed and priced at $31.39 per
share. After deducting various expenses, the actual proceeds raised were
$220,200,000, and the proceeds were used for capacity upgrades and renovation.
Issue Price(yuan) 31.39
Issue Amount(share) 71,500,000.00
IPO date 2001-08-27
Total Funds Raised(yuan) 2,244,385,000.00
Issue Fees(yuan) 48,422,200.00
Actual Funds Raised(yuan) 2,202,174,475.00

(2) Moutai has had no additional shares/debt issuance in recent years

Moutai's very high cash self-sufficiency rate indicates that the company's net cash
flow from operating activities is fully sufficient to fund the company's investment
expansion, which, combined with the company's huge financial assets, means that the
company does not need external financing at all.

4. Distribution Policies

4.1 Distribution Policies

Since its listing in 2001, Moutai has continued to distribute dividends in the form of
cash dividends. The cash dividend of Moutai continues to grow. Meanwhile the
dividend set a new record and the payout ratio reached 51.90% in 2021. The
following chart shows the dividend distribution activities of Moutai in the past five
years.
Table
Dividend History Details in the past 5 years
Ex-
Bonus Issue
Announce Financial Dividend Date of entitlement/
by Reserve Payable Day
Date Year (Per share) Record Ex-dividend
(Per share)
Date

2022/06/24 2021 Final ¥21.675 2022/06/29 2022/06/30 2022/06/30

2021/06/21 2020 Final ¥19.293 2021/06/24 2021/06/25 2021/06/25

2020/06/18 2019 Final ¥17.025 2020/06/23 2020/06/24 2020/06/24

2019/06/22 2018 Final ¥14.539 2019/06/27 2019/06/28 2019/06/28

2018/06/08 2017 Final ¥10.999 2018/06/14 2018/06/15 2018/06/15

According to the share price change in the near days of Moutai's previous dividend
activities in the past few years, the market usually responded positively in the days
after the announce date and record date. This reflects that the high cash dividend in
Kweichow Moutai has a positive effect on the market and meets or even exceeds
investors' expectations for dividend policy. However, the stock price generally
fluctuated and fell after the ex-dividend date. This is also related to future prospects
and market conditions in China A-shares.
Kweichow Moutai Company should continue to distribute cash to shareholders,
taking its both incentives and profitability in to consideration.
For investors, dividend is one of the reasons why they invest a specific company in
stock market. The more dividends, the better. In turn, for the firm, a high-dividend
distribution policy helps to attract more capital (especially long-term capital) to boost
its capability reinvesting and expanding.
In view of the profitability, the table below indicates that Kweichow Moutai Company
has kept stable performance in profit margin for last ten years, representing the
excellent and constant capability to repay its remaining investors and attract potential
investors.
Table of profit margin during past ten years
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Profit
53 51.6 51.5 50.4 46.1 49.8 51.4 51.5 52.2 52.5
Margin %

4.2 Comment on its distribution policy

As Ding Xiongjun, the chairman of the firm, stated, “Kweichow Moutai sticks to the
sustainable and stable cash dividend policy, which is the basic strategy.” Since 2015,
this firm has paid dividends of more than 50% of its net profit every year, which is a
quite rare phenomenon in stock market. This high-dividend policy, along with stable
free cash flow and prosperous development of this firm, is the underlying reason why
so many investors favor this company.