Li Xunlei is the vice chairman of the China Chief Economist Forum and the chief economist of Zhongtai Securities, and there are many articles on the Internet discussing the sharp decline in retail prices in the Moutai market during this time, and most of the mainstream views are analyzed from the perspective of supply and demand, believing that the expansion of production capacity is too fast and the demand is relatively sluggish. Some even ridiculed that the time spent drinking was reduced because of the prevalence of egg hunting. However, from a macro perspective, the ebb and flow of high-end liquor is closely related to the real estate cycle, and its price weakness has been revealed as early as three years ago.
From the perspective of changes in economic growth——
Supply and demand for various types of assets
Since the beginning of 1990, China's economy has entered a stage of high growth and lasted until 2010. In my 2006 article "Buying Things You Can't Afford", I argued that when China's Engel coefficient was as high as 40%, the proportion of residents' asset allocation was very low, and as the economy grew and the Engel coefficient declined, that is, the proportion of people spent on food and clothing decreased, then the proportion of residents' allocation of assets would increase accordingly. Therefore, when you expect that everyone will generally increase their allocation to assets significantly in the future, asset prices will rise sharply. In other words, the demand for assets will be much greater than the supply. In order to get an excess return on investment, you should increase leverage and buy things that you can't afford on your own. In 2006, Moutai's share price had reached more than 170 yuan, which was the most expensive stock in A-shares at that time, which was equivalent to about 45 yuan now if it was calculated according to non-reinstatement. I wrote in my article "The Economic Thrust Behind Baijiu's Move to Luxury (2011)" that the correlation between the growth rate of baijiu production and China's GDP and household income from 1998 to 2009 was 0.69 and 0.65, respectively. It shows that there is a clear correlation between economic growth and the increase of residents' income and liquor consumption. In 2003, the price of liquor per ton of liquor for enterprises above designated size in the liquor industry was 16,000 yuan, and in 2008, the price of liquor per ton of liquor has risen to 28,300 yuan. This shows that the consumption upgrade has been very obvious in recent years, and the price increase of mid-to-high-end liquor is much greater than that of CPI. In less than two years, from the beginning of 2006 to 2007, the Shanghai Composite Index rose more than fivefold. And the bigger increase should be in house prices, because this round of China's real estate bull market has risen for at least 20 years if it is counted from 2000. According to McKinsey statistics, from 2000 to 2020, China's net asset value increased from $7 trillion in 2000 to $120 trillion in 2020, an increase of 16 times. Over the same period, the net asset value of the United States doubled to $90 trillion. Global net asset worth increased 2.3 times from $156 trillion to $514 trillion. It can be seen that the scale of mainland assets is not only expanding far faster than the United States, but also significantly exceeding the global average. However, in terms of the increase in stock price indexes, in the past 20 years, the S&P 500 index has risen 6.3 times, the Nasdaq 100 index has risen 12.6 times, but the Shanghai Composite Index has risen less than 2 times. Obviously, the growth of the mainland's asset scale is mainly characterized by an increase in supply, rather than an increase in the rate of return on investment. For example, in 2006, the circulating market value of the A-share market was only more than 3 trillion, and now the circulating market value has reached 74 trillion, but the index has not risen much. In other words, the expansion of the mainland's asset size is mainly driven by an increase in supply, for example, the mainland economy is mainly driven by investment, and the contribution of capital formation (investment in the troika) to GDP is about twice the average of the rest of the world's economy. The high growth of real estate investment, the total mileage of high-speed and high-speed railways is far ahead of the world, and the scale of IPOs in the A-share market continues to increase, which makes the supply of assets continue to expand, which eventually leads to a surplus of assets. Moreover, while the scale of investment continues to expand, the financial attributes of many consumer goods have also been greatly enhanced, and their prices have also risen sharply, such as famous watches, jewelry and jade, rare wood, high-grade liquor, etc. This reflects the process of deepening the mainland's finance, but does it also show that financialization has been excessive? In 2018, I wrote another article "Buy What You Can't Buy", the main point is that before 2000, China was an era of commodity shortage, and after 2000, the supply and demand of commodities were balanced, but there was a shortage of assets; After 2007, there was an overall surplus of goods; After 2015, most assets have been surplus relative to market demand, but some assets, the so-called core assets, are still in shortage, that is, to buy scarce assets. Of course, scarcity is also relative. For example, before 2001, Pumao produced just over 4,000 tons of base wine, but now it has more than 50,000 tons and can reach more than 70,000 tons in the future. It shows that as the supply increases, so does its scarcity. If demand does not grow as fast as supply, then price pressures will increase.
The main reason for the weakening of high-end liquor -
Real estate has entered a downward phase of a long cycle
The decline in total sales of liquor in mainland China has actually happened a long time ago. Since 2000, liquor production has been on the rise, and by 2007, the growth rate of liquor sales reached a peak of 34%, the same year that nominal GDP growth reached a record high. After the eight regulations, the growth rate of liquor sales dropped significantly, but it still maintained growth, and it was not until 2016 that there was negative growth. In 2015, the total sales volume of liquor in mainland China was 13.12 million tons, and by 2023, it will fall to 6.29 million tons, a decrease of 52%. However, at the same time, the sales revenue of sauce-flavored liquor, which represents high-end liquor, still maintained an upward momentum, accounting for 14.2% of the total sales revenue of liquor in 2015 to 31.5% in 2021, indicating that after the eight regulations, although the proportion of consumption of high-end liquor for official business has dropped significantly, the growth of business consumption and private consumption has almost completely replaced official consumption. Changes in the proportion of sales of sauce-flavored liquor in liquor sales
Source: Wind, Zhongtai Securities Research Institute's proportion of sales revenue of sauce-flavored liquor has fallen to 30.4% by 2023, and it is estimated that the proportion will continue to fall in 2024 and beyond as the price of high-end liquor accelerates. Judging from the production of liquor during the epidemic in the three years from 2020 to 2021, there was no sharp decline, and the sales of sauce-flavored liquor increased sharply during the period. An interesting phenomenon was found, Moutai, which used to be the main official liquor, still saw a sharp increase in sales after the eight regulations, but Audi, which was also an official car, fell sharply, from far ahead of foreign brand cars such as BMW and Mercedes-Benz to far behind other foreign brand cars. The logic behind this may be that official cars must be made in China, so Audi will no longer be a symbol of official cars. But Moutai still has an obvious "official wine" color. The above phenomenon is nothing more than to express the meaning that the main factor of the current decline in liquor prices is the downward trend of the real estate cycle. China's real estate contribution to GDP should be between 20-25%, and when the real estate cycle enters a downward phase, it usually has a large impact on the economy, which is the so-called multiplier effect. In fact, the decline in the price of high-end liquor did not start this year, but the frequency of hot searches has increased this year. Judging from the price trend of Moutai old liquor, the wholesale price of liquor after 2021 is already lower than the current market price; The compound rate of return on the five-year holding of Moutai purchased that year has dropped from 28.81% in 2021 to 4.83% currently. Changes in the compound rate of return of old liquor held for five years
Source: Wind, Zhongtai Securities Research Institute It can also be seen from the chart above that the decline in the last round of Moutai's five-year yield occurred from 2012 to 2017, which should be related to the eight regulations, but the sales volume of Moutai did not decline significantly. But will this round of price decline affect its sales? From 2015 to 2023, the prices of the top 11 liquor listed companies in terms of sales volume increased by 215%, that is, in the process of a sharp decline in sales, they maintained high profit growth through price increases. Now that prices have turned from rising to falling, the logic of continuing to maintain high earnings growth no longer seems to be valid.
Population Ageing Accelerates –
What is the impact on high-end liquor consumption?
Liquor and cigarettes are similar in that they have undergone a process of volume reduction and price increase. That is, the sales volume is declining, but the sales revenue is increasing, which shows that before 2021, the momentum of consumption upgrading in the mainland is very obvious. For example, in 2013, the sales of premium cigarettes accounted for only 27%, but in 2018, they increased by 42%. Similarly, Moutai's sales revenue now accounts for about one-third of the top 14 liquor listed companies. The consumption of cigarettes in mainland China has been upgraded
Source: WIND, Zhongtai Securities Research Institute From the perspective of the global share of luxury consumption, according to Bain & Company statistics, China accounted for only 1% of the global share in 2000, and by 2018, it accounted for one-third of the world. 2020 should be the highest point in the global share of mainland luxury consumption, which is almost in line with the inflection point of the mainland real estate cycle. Changes in the share of global luxury consumption
Source: WIND, Zhongtai Securities Research Institute was affected by the epidemic, and the momentum of consumption upgrading in mainland China has weakened significantly after 2020. From the perspective of population, China has entered a stage of deep aging in 2021, that is, the proportion of people aged 65 and above in the total population exceeds 14%. Moreover, because the "second baby boom" age group, which has the largest number of births in the history of the mainland, will enter the "old age boom" defined by the United Nations from 2027, the aging population will be accelerated. For example, Germany has gone from deep aging to super-aging (20% elderly) in 36 years, which is very slow. It took 12 years for Japan, while it took 9 years for China. This means that the consumption of high-strength alcohol is likely to decline rapidly. According to the 2022 Luxury Spirits Strategy Study released by IWSR, an international wine and spirits research organization, baijiu accounts for 84% of the international luxury spirits market (products with an average price of more than US$100 per bottle), but consumption is almost entirely limited to China. China is the largest market for international luxury spirits (excluding liquor), accounting for more than 30% of the global market share. In other words, China's high-end liquor has an astonishing share of high-end liquor in the world, and how much room for further improvement can it be? According to the statistics of the China Liquor Industry Association, from 2014 to 2022, the revenue of liquor enterprises above designated size increased from 580 billion yuan to 660 billion yuan, with a cumulative growth rate of only 13% in 8 years, and a compound annual growth rate of less than 2%. Therefore, I suspect that as the population ages, sales of high-alcohol sake will decline, and we will gradually enter an era dominated by low-alcohol alcohol. Cases from Western countries such as the United States, Europe, and Japan show that in the process of population aging, there are common characteristics such as an increase in the sales share of low-alcohol liquor and a decrease in the sales share of high-alcohol liquor. Looking back on the past 30 years, domestic famous cigarettes and wines have taken advantage of the opportunity of consumption upgrading to defeat foreign tobacco and liquor through continuous price increases; And high-end liquor beats high-end wine again. But everything has a cycle, and when the tide of the times rushes down, individual efforts may seem insignificant. ——————
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