Tembusu’s white liquor investment in Guizhou a stepping stone to more opportunities
As a teetotaller, Lim Hwee Hua is probably the best person to have as a partner in a joint venture (JV) to fund the growth of the “baijiu” (white liquor) industry of Guizhou province, home to numerous such producers. “There will be no pilferage,” quips Lim, co-chairman of Tembusu Partners, in an interview with The Edge Singapore.
On Nov 6, Tembusu announced it had launched its first China Guizhou Baijiu Fund in partnership with Renhuai Moutai Flavor Liquor Industry Development & Investment, an entity linked to the Renhuai city government and based in Guizhou province. Renhuai is known as the “liquor capital of China”, where the Renhuai red sorghum — the key ingredient for making the fiery transparent liquor — is produced.
The partners will raise up to RMB2 billion ($388 million) to buy and store the foundation spirit used to make baijiu. For every three dollars Tembusu raises, the local partner, the Renhuai city government, will chip in a dollar.
The RMB2 billion can be used to buy about 40,000 tonnes of foundation spirit from the network of local farmers who have built a cottage industry out of supplying this essential ingredient. It has to be aged for five years before it can be used to blend into the final product. The foundation spirit held by the fund will then be sold to a local government-linked entity, which will make its Jiutou brand — one of numerous brands from Guizhou.
Tembusu has no existing investments in Shanghai-listed entity Kweichow Moutai Co, which produces the world-renowned “Moutai” brand of baijiu. The company is majority-controlled by the Guizhou provincial government. Tembusu’s JV partner for the fund, by contrast, is the Renhuai city government, although Lim points out that, ultimately, the city and provincial governments have in effect common shareholdings.
Lim says the key purpose of the fund is to give the local government greater financial strength to provide the suppliers of foundation spirit with more certainty in terms of the volume it can buy from them each year. “In a sense, we are providing the financial overlay, and it is uplifting for the whole market,” she says.
Lim adds that the fund can enjoy an annual gross return of 8% and is structured in such a way that Tembusu enjoys two layers of capital protection. So, in the event of a default, the local government, which has a one-third share of the capital, will bear the losses. In the unlikely event that that is still insufficient, another city government-linked company will assume the additional losses.
The fund is not exposed to production risks as well. “If there’s bad weather or anything, we don’t take any risk in production. We manage only the price volatility,” Lim says. “There’s a bit of an incentive where we may share some of the upside but, for this very first fund, we just want to get it going with as little risk managed as possible.”
Express lane
According to Lim, it took more than a year of negotiations before the JV was formalised. Prior to the signing, the local government gave Tembusu two consultancy projects to work on. “We found that the relationship worked well, and it evolved into a QFLP licence,” says Lim, referring to Tembusu’s status as the only foreign private-equity fund manager to be awarded the Qualified Foreign Limited Partner status in Guizhou by the State Administration of Foreign Exchange in 2018.
QFLP status accelerates the process for foreign investments in domestic enterprises in China by creating an “express lane” for regulatory approval and taxation. One benefit is bypassing the issue of foreign currency convertibility.
Lim says that, so far, the response from investors to this fund — both in and outside China — has been “quite positive”. The fund aims to raise RMB500 million for its first round.
While Tembusu’s investment in the baijiu industry is limited to the foundation spirit for now, there are many more parts of the industry in Guizhou — such as the production process, logistics, and sales and marketing — that could do with additional funding to grow to the next level. Lim says: “Looking at longer term, the fund structure may evolve over time. We may explore not just freshly produced foundation wine, but other types too. So, we just want to do this as a template, then repeat,” she says.
Big brother Moutai
The Moutai brand, in its distinctive redand-white bottles, has long commanded hallowed status, as it is the designated liquor served at China’s state banquets.
Precisely because of its value and the fixed quantity produced, the brand suffers from counterfeiting. It is also the subject of speculation as it passes along the distribution chain to the end-user.
Now, there are many other smaller players in Guizhou and the province is keen to make this industry more developed and sophisticated — the way Bordeaux of France has become synonymous with fine French wine. Players in Guizhou have come together to develop their own version of the Parker points’ system — widely used in the Western wine world — in a bid to come up with an acceptable, quantifiable way of segmenting the range of products in the market.
Lim believes the industry can grow the market in several ways. For example, the makers can introduce variants with lower alcohol content for women and younger consumers. The liquor can also be used as a food additive. “There’s actually so much potential,” she says.
Interestingly, Kweichow Moutai, well entrenched as the market leader, is happy to help other producers up their game through a sharing of expertise — and they are keen to close the gap. The official recommended retail price of a 500ml Moutai is RMB1,499, but actual selling prices are nearly double. By contrast, even premium variants of other brands cost only a fraction of that. “The pricing differential is a complete exaggeration of the quality difference. There’s a lot of potential to up the quality of processing and production, and also convince people of it. At the end of the day, why would you pay so much more?” says Lim.
That is why, even though the city government is Tembusu fund’s partner and the provincial government is Moutai’s controlling shareholder, Lim is confident that the fund will not be collateral damage in bureaucratic turf wars. “Everyone is pulling in the same direction. Moutai is acting like the big brother to the many other winemakers,” she reasons.
In 2012, the baijiu industry suffered a sobering drop in demand when President Xi Jinping launched his anti-corruption drive. Sales of Moutai plummeted, in tandem with the crackdown on lavish banquets that China’s businessmen are fond of throwing and officials had grown too fond of attending. More importantly, the practice of giving expensive bottles of Moutai as gifts was stopped.
Sales of Moutai have since risen again. While demand in China is big, there is demand for Moutai outside the country too. “Think about the Chinese diaspora. Anywhere outside China, if you bring this to a dinner, you are like something, because it is so hard to get one bottle without losing an arm and a leg,” says Lim.
According to a Euromonitor report in 2018, baijiu consumption is set to grow at a compound annual growth rate of 10.1% by 2022. Baijiu makes up 90% of total spirits sales in China and half of China’s alcohol sales.
Baijiu and data centres
Besides its natural beauty and baijiu, Guizhou has in recent years gained a reputation for being a choice location for data centres. Natural attributes such as altitude and climate have helped maintain its yearround temperature in the teens. Data centres, with their racks of servers that store data or host web pages, require a high amount of energy to cool. In hot and humid locations such as Singapore, data centres need air-conditioning. Because the climate in Guizhou is cooler, however, data centre operators require less power.
In addition, there is plenty of hydropower generating electricity. To this end, huge tech companies such as Apple, Amazon.com and Alibaba Group Holding have started operating data centres in Guizhou. Lim says Tembusu is exploring ways in which it can bring together smaller companies that need data centre capacity to collaborate in this matter.
Compared with the coastal areas, there are relatively fewer manufacturing investments in Guizhou. As a result, it is less polluted than most other areas, thus making its mountainous scenery a tourist attraction. For Tembusu, its baijiu fund investment is a stepping stone to opportunities in hospitality and real estate projects. Specifically, the company is keen to invest in training people in the hospitality sector. “If you marry this wine and scenery, we just think there’s a lot of potential,” says Lim. E