Morningstar | Lowering Kweichow Moutai’s Stewardship Rating to Poor; FVE Remains Unchanged at CNY 850
We downgrade our stewardship rating on Kweichow Moutai to Poor from Standard, as we believe its lax corporate governance practices and questionable ethics culture have yet to be addressed following repeated indiscretions. We believe the company has yet to establish a thorough supervisory mechanism to prevent the recurrence of corruption that may hurt company profits. Nevertheless, this stewardship rating change has no impact on our fair value estimate, and we still expect the company to grow solidly at a CAGR of 12% in earnings over the next five years, given the sustainable strong demand on Moutai liquor. We view the shares as fairly valued at current levels, trading slightly above our CNY 850 fair value estimate.Yuan Renguo, former chairman of Moutai Group, was arrested in May 2019 and accused of taking bribes from government officials looking to get into the lucrative Moutai distribution business, according to the Central Commission for Discipline Inspection. The case is still pending, but the charges were part of a case against Wang Xiaoguang, the former vice governor of Guizhou, who was sentenced to 20 years in prison for graft in April 2019.
We are concerned that since there is no independent committee undertaking a review of the company’s practices, we believe the company may not have implemented the culture shifts needed to improve and encourage firmwide ethical practices. The business is strong, but our poor stewardship rating reflects our concerns that management practices are lagging in addressing governance risks.
Kweichow Moutai is engaged in the manufacture and sale of "Guizhou Moutai" series distilled spirits; manufacture and sale of beverages, food and packaging materials; development of anti-counterfeiting technologies; and research and development of relevant IT products. Through its subsidiaries, Co. is also engaged in the wholesale of agricultural vice-local products, building materials, decoration materials, metal materials, machineries, electronic products, telecommunication products, hardware, rubber products, general merchandises and furniture. Co.'s products include millesimes liquor, gift liquor, common liquor and other liquor series.
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