During a recent weekend gathering with friends, I mentioned that I had begun investing in Moutai, the iconic Chinese liquor

One of my friends expressed skepticism, raising three major concerns: First, the price volatility of liquor at retail outlets, which she felt was still uncertainSecond, she pointed out that younger generations seem less interested in traditional liquors like Moutai, hinting at a worrying demographic trendLastly, she noted the issue of excess inventory accumulating in the market.

These concerns reflect the apprehensions many share regarding Moutai's market stability

However, when it comes to the fundamental financials of Moutai, there are seldom doubts; it's renowned for its robust financial performanceInstead, it is these more nuanced questions surrounding market dynamics and consumer behavior that cause anxiety.

Here, I would like to consolidate my perspective:

(1) Issues related to Moutai’s inventory, declining retail prices, valuation, and investment timing.

To comprehend these problems, we must begin at the source with two fundamental truths: First, prices are determined by the forces of supply and demand; second, demand is influenced by price

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Moutai, despite its premium status, is not exempt from these economic laws.

Due to the intricacies involved in the brewing process, Moutai's production capacity increases relatively slowly, resulting in a stable supply of approximately 40,000 to 50,000 tons released into the market annuallyHowever, demand for Moutai can be categorized into two types: consumption and hoarding.

Consumption, or the act of uncorking a bottle, can further be divided into two segments:

The first segment consists of high-net-worth consumers

This demand is anticipated to be less affected by fluctuations in Moutai’s price or the overall economic climate, thus deeming it a stable consumption behavior.

The second segment is the consumption tied to business activities or social gatherings, where Moutai is often a requisite presenceThis demand is heavily influenced by price; if Moutai's price surges, consumers may shift to substitute brands like WuliangyeConversely, should prices fall, it could siphon demand away from these alternativesThe state of the economy also plays a pivotal role, with a thriving economy boosting demand and a struggling one diminishing it.

Typically, the open-bottle rate, which refers to the percentage of Moutai consumed, ranges from 50% to 70% each year, although precise figures remain elusive

It is generally accepted that when Moutai is priced lower, the open-bottle rate rises, whereas high prices deter consumption, reflecting a common human tendency to hesitate in overindulgingThe Moutai not opened each year constitutes what is termed social inventory.

Social inventory can be further dissected into two components:

The first segment encompasses bottles kept by regular consumers at homeThis stock rarely gets sold, thereby exerting minimal pressure on market supply.

The second segment consists of stock held by distributors and resellers, which arguably gives Moutai a financial investment characteristic

Moutai's wine is particularly attractive as an investment; older bottles appreciate in value, as does stock appreciation due to anticipated price hikes.

If Moutai's prices improve, distributors may withhold stock or even accumulate moreIn contrast, should prices decline gradually, they might begin to release inventoryIf prices plummet rapidly, there is a rush to sell off stock, exacerbating the downward spiral in pricingHistorically, the collapse of Moutai's retail pricing occurred between 2012 and 2013 during the anti-corruption crackdown and the plasticizer controversy when stocks held by distributors flooded the market, driving prices to nearly match the manufacturer’s suggested retail price.

This is why it is often said: only the Moutai that is consumed is good Moutai.

With a foundational understanding of Moutai's supply and demand relationships, analyzing the fluctuations in its prices, performance, valuation, and optimal investment timings becomes significantly easier.

Currently, Moutai's factory price stands at 1169 yuan, with a recommended retail price of 1499 yuan; however, the actual market price hovers around 2500 yuan

The disparity between Moutai's factory price, suggested retail price, and the actual market price is substantial.

How should we interpret the differences in these Moutai price levels concerning its demand, performance, and valuation?

1. Moutai sells at 1169 yuan; this price range corresponds to a demand that is estimated at a minimum of 60,000 to 70,000 tons annually, clearly surpassing Moutai's supplyIn other words, regardless of how the external pricing system fluctuates, as long as prices do not fall below the recommended retail price, Moutai’s performance will remain unaffected.

What drives Moutai's performance growth? Primarily, it is reliant on production capacity enhancements; secondarily, it derives from price increases

When the gap between Moutai's actual retail price and factory price becomes excessive, expectations for price increases emergeBetween 2009 and 2012, Moutai raised its prices frequently, executing increases annually at varying ratesPost that, Moutai adopted a trend of increasing prices approximately every five years by about 20% each time.

2. Presently, with the market's actual retail price at 2500 yuan, what are the implications? Firstly, it influences Moutai's open-bottle rate, and secondly, it affects the perceived valuation of Moutai.

Let’s discuss the impact on the open-bottle rate.

Given the high prices, the actual consumption demand is suppressed; thus, Moutai is hoarded by distributors and certain consumers

Moutai has maintained this retail price (if not higher) for several years, leading to a significant social inventory buildupIf this situation persists, issues will undoubtedly ariseIn recent years, with economic difficulties pressing in, distributors are compelled to offload inventory, increasing the supply of Moutai (including the official annual factory output and additional stock released by distributors), surpassing the corresponding demand for this price point, leading to a natural decline in Moutai’s actual retail price.

As Moutai's retail prices continue to fall, the open-bottle rate will gradually increase, thereby alleviating this social inventory issueOnce prices reach a certain low point (near the manufacturer’s suggested retail price), the excess inventory will almost be consumed

At this juncture, the lack of additional inventory means the market will shift once again to a state of supply shortage, initiating a new hoarding cycle, causing Moutai retail prices to enter an upward trajectory again.

Now, let's discuss the influence on Moutai’s valuation.

The higher the actual retail price of Moutai, the stronger the expectation for price hikes based on factory pricing, which inherently boosts the market's perception of Moutai’s valuationThus, during periods when Moutai’s retail prices rise, its valuation typically remains robust, with its price earnings ratio consistently climbing.

Currently, however, as Moutai's actual retail prices trend downward, naturally, expectations for price hikes diminish, leading investors to adopt a more pessimistic view concerning Moutai’s performance growth, resulting in a considerable drop in its valuation

Particularly during September, Moutai experienced a continuous decline in wholesale prices, causing market sentiment to plummet and stock prices to follow suit.

How do I view the investment timing for Moutai?

1. I am acutely aware that Moutai's current valuation is on a downtrend, and I had initially planned to wait for a P/E ratio of 20 or even 15 before investingHowever, I soon realized one distinct trait of Moutai stock: it is held by many savvy investors, and its financial disclosures are exceedingly clear, leaving little room for bargain opportunities.

Moutai's valuation tends to accurately reflect all public information available; therefore, should Moutai’s valuation fall one day, it will undoubtedly be facing a graver situation, making it impossible to find bargains.

2. Given that it's not easy to chime in and collect on valuation discounts, I have opted to approach the situation from the perspective of absolute returns, identifying buying points based on dividend yields

Moutai's low factory pricing means that changes in retail prices hardly affect its actual earnings.

I simply need to wait for an appropriate dividend yield, and even if Moutai's performance does not see immediate growth, I can comfortably accept that scenarioFor instance, with a current dividend yield of 3.5%, which is significantly higher than low-risk investment rates in the market, I find security in holding this stock, ensuring a bottom-line returnMoreover, if performance improves in the future, that dividend yield will increase correspondingly, providing both offensive and defensive strategies.

(2) The impact of younger generations' drinking habits, decreased birth rates, and an aging population.

I do not deny that these factors may influence the demand for liquor; however, I believe that the core impact lies primarily in the economic growth — the average income levels and the number of individuals in the middle class

The demand for premium liquors, in particular, correlates strongly with the growth of high-net-worth individuals.

The drinking habits and generational influences on population numbers usually exhibit two characteristics: first, their impact unfolds slowly over time, and second, the extent of impact remains uncertainObserving the trends of distilled spirit companies in developed countries abroad, we see that their declines in population and economic standing have already been played out over the past decade.

Take for instance the performance trends of several renowned spirit companies over the past decade: Diageo from the UK, Pernod Ricard and Rémy Cointreau from France, Bacardi from the USA, and Davide Campari from Italy

Observing their revenue patterns indicates that declines are not evident; overall, their revenues continue on an upward trajectory.

With Moutai priced as a high-end beverage, it has often been categorized within the luxury goods sectorPresently, there exists a narrative suggesting that younger individuals are more pragmatic and individualistic, opting not to rely on established brands for social standingHowever, analyzing data from the leading global luxury brands such as LVMH, Hermès, L'Oréal, and Richemont reveals a consistent and robust growth trend.

Honestly, I once shared some of these viewpoints, but my perspective has shifted significantly