China’s Liquor Giants Intoxicate Investors

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A dizzying rally this year has put China’s top distillers firmly in the ranks of the world’s most valuable consumer-goods companies.

Shares in

Kweichow Moutai Co.


600519 0.41%

, which at the start of 2020 was already the world’s biggest alcoholic-drinks company by market capitalization, have gained 56%, valuing it at about $353 billion as of Monday. That means not only does the state-owned enterprise tower over Western rivals like

Diageo

PLC, and brewing giant Anheuser-Busch InBev SA, but it is also bigger than

Coca-Cola Co.

, LVMH Moët Hennessy Louis Vuitton SE or

Toyota Motor Corp.

Rival

Wuliangye


000858 1.21%

Yibin Co.’s share price has more than doubled, for a market cap of $167 billion. An index of 36 drinks companies whose shares trade in Shanghai or Shenzhen rallied 86.7% this year, compared with a 23% increase in China’s CSI 300 benchmark, according to Wind.

The index also includes beer companies, but the most valuable players are mostly distillers who specialize in baijiu, a fiery Chinese spirit made by fermenting sorghum or other grains.

Moutai’s drinks, which have an unusual aroma reminiscent of soy sauce, have traditionally been served at state banquets, making them a homegrown status symbol for affluent Chinese.

Investors and analysts credit China’s quick recovery from the new coronavirus, Chinese drinkers’ growing thirst for pricier drinks, and some smart corporate initiatives for the hot streak.

“The industry is riding on the power of the middle class,” said

Allen Cheng,

an equity analyst at

Morningstar

in Singapore.

Lockdowns hit the country hard in the first quarter, but a swift turnaround since then has put China on track to be the only major economy to grow this year. As of the third quarter, disposable incomes were growing again, rising 0.6% from a year earlier, official statistics show.

Foreign institutions are among the industry’s fans. As of September, Moutai was one of the biggest holdings in U.S. money manager Capital Group’s New World Fund, for example. The fund’s stake was nearly $627 million.

Eva Wang, a Greater China research analyst at J.P. Morgan Asset Management, said Chinese consumers were buying higher-end products as their incomes rose, favoring market leaders in alcohol and in consumer staples more broadly. That meant Moutai and Wuliangye have grown sales and earnings faster than rivals, boosting their market share, she said. Analysts polled by FactSet expect the duo to grow earnings by 13% and 17%, respectively, for 2020.

The two giants have both overhauled parts of their business, too. Moutai is reducing its reliance on traditional distributors and is selling more drinks directly online, which lets it boost profit margins without dampening demand. Mr. Cheng at Morningstar said Moutai had struggled to end long-term relationships with distributors last year, but the pandemic helped it move faster.

For its part, Wuliangye has spent more on branding. It has also embraced a digital approach, such as using QR codes to track sales and manage inventory. This has made it more efficient and more responsive to consumer demand, analysts say.

Shen Zhifeng,

an analyst at UOB Kay Hian in Shanghai, said the changes set the companies up well for 2021. “Their good performance can continue through next year,” he said.

The run-up has sent valuations soaring. Moutai and Wuliangye shares trade at 42 and 43 times forecast earnings respectively, according to FactSet. Over the last five years, the average ratios have been 25 and 22 times, respectively.

Some observers see other reasons for caution.

Euan McLeish,

an analyst at Sanford C. Bernstein, said a fresh anticorruption drive seemed to be on its way. In 2012 and 2013, a crackdown on graft in China pummeled Moutai stock, since the drink is popular at official dinners and for gifts.

In July, a social-media account run by the People’s Daily, the Communist Party mouthpiece, said Moutai shouldn’t be used for speculation or bribes, causing a brief stock selloff.

In addition, Mr. McLeish said he had more corporate-governance concerns about Moutai than Wuliangye, since it is rather opaque about targets and strategy. Moutai is controlled by a local government in the southern Chinese province of Guizhou.

Write to Chong Koh Ping at chong.kohping@wsj.com

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