August 13, 2019 / 3:09 AM / 2 months ago

Breakingviews - Moutai investors channel their inner Carl Icahn

A customer walks past a glass case displaying Maotai liquors with different price tags at a supermarket in Shenyang, Liaoning province August 8, 2012. The makers of China's fiery liquor baijiu, a pricey, potent drink that is a staple at state dinners, say it inspires poets and can even ward off dementia. For investors in the largest baijiu makers Kweichow Moutai Co Ltd and Wuliangye Yibin Co Ltd, the appeal is more mundane: the companies paid out huge dividends and raised earnings forecasts when a slowing economy had prompted dozens of Chinese firms to issue profit warnings. Picture taken August 8, 2012. REUTERS/Stringer (CHINA - Tags: BUSINESS)

HONG KONG (Reuters Breakingviews) - Kweichow Moutai’s investors are channelling their inner Carl Icahn. Scrappy shareholders somewhat successfully challenged the Chinese distilling behemoth, echoing the U.S. activist’s tilts at titans such as Apple. The state-backed company opted to sidestep a vote and cap related-party deals. There’s much more work to be done, however, against Beijing-linked corporate governance.

The $180 billion booze maker said over the weekend that transactions with its parent and other associated entities this year would not exceed 5% of its net asset value at the end of 2018, or 5.6 billion yuan ($793 million). Moutai added that its parent company would respect the “promise” it made when the distiller went public in 2001, and repeated a familiar pledge not to harm the interests of minority shareholders.

These steps follow an outcry that started earlier this year, when news emerged that Moutai’s state-owned parent had established a wholly-owned sales unit. The listed company has been reducing the number of third-party distributors that buy its flagship tipple for 969 yuan and sell it for more. The idea was for it to keep some of that markup for itself, but the sudden appearance of the new entity suggested some of it would be siphoned away. A testy letter from the Shanghai Stock Exchange in May prompted the company’s response.

Limiting the payments cannot be considered a full victory for the little guys. Exchange rules say related-party transactions above a 5% net asset threshold triggers a shareholder vote, Bernstein analysts note. Even so, the company’s pledge suggests that management at least listened during the unexpectedly clamorous annual meeting in May and isn’t yet inclined to put the idea to the ballot.

The fight is far from finished at Moutai. Angry retail shareholders don’t necessarily have the same bargaining power or financial tools as Icahn and his fellow pushy investors in Western markets, but securities regulators may be of some assistance. Watchdogs are probably keen to avoid a high-profile corporate governance debacle involving the most actively traded company on Hong Kong’s stock portal to Shanghai, where foreign investors bought and sold $3 billion worth of Moutai equity last month. For now, this confluence of factors is worth a toast.

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