China’s second most valuable listed company, Kweichow Moutai at $315bn, is no tech stock. It is a hot stock nonetheless. This leading maker of baijiu — a local liquor known as China’s firewater — has proven one of the most lucrative businesses and local investments in the past decade.
That record did nothing for rival ZJLD’s Hong Kong listing on Thursday. Yet, its flop should not have surprised anyone.
With an alcohol content of as high as 60 per cent by volume, baijiu is China’s most popular liquor and amazingly accounts for a third of global alcohol sales. KKR-backed ZJLD had high hopes because it was the first Chinese baijiu maker to list outside the mainland markets.
Kweichow Moutai’s share price has jumped 10 times in the past 10 years. Understandably, Goldman Sachs and China Securities anticipated a pop at the open. ZJLD does have impressive profitability — gross profit margin was 55 per cent last year and operating profitability has averaged 28 per cent over the past three years.
Unfortunately, the drink’s popularity did not translate into investor demand for ZJLD, which raised $675mn. Shares fell 17 per cent at the open, even after the stock priced its initial public offering at the bottom of the price range amid weak demand for new share sales. The listing values the company at about $4bn, at a steep 27 times earnings.
That is a premium to unparalleled market leader Kweichow Moutai, which has roughly twice the margins and has held those for the past decade. The partially state-owned company’s bottles are status symbols with a rising collectable value. Even so, shares of Kweichow Moutai are down a third from its 2021 peak due to a local liquor glut.
The ZJLD flotation offered a litmus test due to its size, the largest in Hong Kong since October. Many have delayed listings due to weak investor appetite. Total new share sales by amount this year are half that of last year. ZJLD’s wobbly entry suggests the market’s hangover has yet to end.
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