Moutai will raise a glass to its LVMH moment

Li Ning

02/01/2025 08:15

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Chan Ka Sing
       HONG KONG, Jan 2 (Reuters Breakingviews) - Kweichow
Moutai–Li Ning, or KMLN, may not have the same ring as Louis
Vuitton Moët Hennessy, but it could be China’s next national
consumer champion. Moutai  600519.SS , the world’s largest
distiller, wants to appeal to young shoppers. Marketing gimmicks
with brands from Dove chocolates to Luckin Coffee have so far
failed to gain traction. A bold swoop on the iconic but
struggling sportswear retailer, Li Ning  2331.HK , might be the
key ingredient to create China’s answer to LVMH  LVMH.PA .
    Moutai specialises in a sorghum-based spirit, often referred
to as firewater due to its 50%-plus alcohol by volume (ABV). At
roughly $200 a bottle, its top-shelf flagship tipple, “Flying
Fairy”, has long been a hallmark of the country’s booze-soaked
official banquets. In 2021, the Shenzhen-listed company’s market
capitalisation hit a peak of over $450 billion, surpassing
LVMH’s. But a crackdown on corruption and a slowing economy have
been sobering for sales; Moutai’s stock has nearly halved since
then.
    Tapping a new generation of customers, then, is a wise move
for the state-backed firm. In 2024, it rolled out limited
edition booze-filled chocolates, spirit-infused lattes and even
ice cream. But net profit growth is forecast to slow to 16% in
2025, down from a 20% growth rate in the past two years, per
LSEG.
    A more potent move would be an acquisition of beloved
gymnast Li Ning’s eponymous sporting goods retailer. The company
has benefited from a trend known as “guochao”, literally meaning
“national tide”, that signifies Chinese preference for domestic
brands over Nike  NKE.N  and Adidas  ADSGn.DE . But as with
Moutai, a consumption slump in the world’s second-largest
economy has hit sales.
    Hong Kong-listed Li Ning’s market value was just $5 billion
as of the end of November, down 85% from its 2021 peak. The
stock trades on roughly 11 times forecast next 12 months’
earnings, compared to 15 times at main rival Anta Sports
 2020.HK . Its beaten-down valuation has prompted Chair Li Ning
to consider taking the company private, Reuters reported, citing
sources. Nonetheless, a takeover by a cash-rich state giant may
be easier to pull off, given the founder only owns a 10.7% stake
in Li Ning.
    A Moutai–Li Ning union could reinvigorate the “guochao”
trend – after all, many Chinese are fiercely proud of these two
brands. Assume a 30% takeover premium for Li Ning, and a deal
could be worth around $5 billion including debt. That’s
manageable for Moutai: as of September, the group had little
debt and $25 billion of cash and cash equivalents – the largest
pile among listed A-share companies.
    Against China’s gloomy economic backdrop, Moutai can still
raise a glass to this tantalising opportunity.
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    This is a Reuters Breakingviews prediction for 2025. To read
more of our predictions, click here.

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Graphic: Li Ning’s shares have taken a beating    https://reut.rs/3ZqlSJT
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 (Editing by Robyn Mak and Ujjaini Dutta)
 ((For previous columns by the author, Reuters customers can
click on  CHAN/  
KaSing.Chan@thomsonreuters.com))