For years, AEI Corp has been struggling with its loss-making aluminium parts business. Under Sun Quan, the company’s executive director and new controlling shareholder, AEI is moving into the alcohol distribution business.
On Dec 31, 2020, AEI, which is — as of December 2019 — 52.57% held by a fund led by Sun, announced a deal to buy alcohol distributor MTBL Global, which is separately and solely held by Sun via Capital Impetus Group. Under the terms of the deal, AEI will pay up to $20 million, subject to conditions such as performance targets.
The deal is still subject to shareholders’ approval, but if it goes through, Sun foresees that the Singapore-listed company will one day be Asia’s Diageo, the UK company known for its expansive alcohol portfolio.
MTBL is an acronym for the key product it has the exclusive rights to distribute outside China: Moutai Bulao. The Moutai brand of baijiu (Chinese white liquor) is produced by the stateowned Kweichow Moutai Group, famously used for toasts during China’s state banquets.
Kweichou is a transliteration of Guizhou, where this liquor is produced. Bulao translates literally to “won’t turn old”, and Moutai Bulao is produced by a subsidiary company, Guizhou Moutai Winery (Group) Health Wine Co. As the name indicates, it is the Moutai group’s foray into what it calls the “health wine” market segment. Besides the core ingredients of sorghum, wheat and water used to brew Moutai Bulao, the blend includes herbs such as radix angelicae, longan aril, medlar, and hawthorn.
According to AEI’s Dec 31 announcement, MTBL owns the exclusive rights to sell Moutai Bulao in 125ml bottles outside mainland China until Dec 31, 2027. The rights cover 11 countries, and include Hong Kong, Macau and Taiwan. In the period between Dec 6, 2018, and Dec 31, 2019, it generated revenue of $1.75 million and earnings of around $240,000.
In an interview with The Edge Singapore, Sun says he expects distributing Moutai Bulao to have a better chance to grow a more viable business than aluminium parts making which faces “limited growth prospects”. The Covid-19 pandemic had merely worsened ongoing problems, such as rising costs and lower demand from customers such as hard disk makers.
For the full year ended 31 Dec, 2020, AEI reported losses of about $5.66 million, 3.2% lower y-o-y. Revenue increased 8.7% y-o-y to $9.86 million. The company’s share price closed at $1.25 on March 11, giving it a market value of $72.24 million. As at Dec 31 last year, the company’s cash stood at about $29.6 million, and its net asset value per share was 71.8 cents, compared to 82.2 cents a year ago.
Massive potential
AEI, as a company, was started in 1983. Sun came into the picture just a few years ago. On Aug 8, 2017, the New Impetus Strategy Fund — of which Sun is a director — announced it would be investing $50 million in several stages, by subscribing for up to 62.5 million new AEI shares at 80 cents each. If all shares are issued, its share base (including treasury shares) will be enlarged from around 28.1 million to up to 92.5 million. Sun was appointed the company’s non-executive chairman on April 30, 2018 and was redesignated as executive director on March 23, 2020.
Sun is now trying to steer AEI into new markets with bigger potential. According to him, the output value of baijiu in 2019 was nearly 1 trillion yuan, but the bulk of the sales was within China. Including Hong Kong, Taiwan and Macau, overseas sales accounted for just almost 1% of the total output value of this product. Sun is optimistic that this means a massive potential for the penetration of baijiu into the overseas market.
He believes one way to drive demand is to change how the product is marketed. “You can’t simply buy advertisements on various media channels and expect that people will drink it.” There has to be a deeper cultural understanding of baijiu, which will then lead to deeper appreciation and presumably a higher propensity to buy baijiu, he says.
Sun refers to how closely linked sake is with Japanese cuisine. “Whenever you go to a Japanese restaurant, what is offered on the menu? Sake. Every Japanese restaurant offers sake, and people try it and they appreciate [Japan’s] drinking culture. As a result, sake sees a huge penetration rate outside Japan.” In contrast, while there are probably more Chinese restaurants around than Japanese restaurants, not every Chinese restaurant will carry baijiu. “And even if it does, not many people order it,” he laments.
Improved logistics
To promote appreciation and awareness for baijiu, Sun plans to set up a number of Moutai Cultural Centres around the world. The first was established in China, and the second in Suntec City, Singapore. Every cultural centre also comes with a bar and lounge, and this will be used to educate visitors about Chinese drinking culture.
He hopes to rely on the word-of-mouth effect as well. “It’s true that this place cannot directly educate many people directly,” says Sun, referring to the cultural centres. “However, people who come and experience Chinese drinking culture with Moutai Bulao will, in turn, talk about it to others around them and more people will come to be able to appreciate baijiu,” he says.
Sun also plans to have a more cost-efficient way to sell his wares: by deploying dedicated vending machines, carrying 125ml bottles, in restaurants. The machines will be plugged into a smart logistics chain that automatically triggers replenishment orders when stocks run low. The logistics chain is part of a digital network that allows real-time updates of the transaction and sales data, aiding shipping, deployment, and central order planning for customers throughout the world.
To make it worthwhile for the restaurants to host the vending machines, MTBL will sell the liquor to them at a discounted price, with the restaurants earning the difference. The current market price for a 125ml bottle is $59, and each machine can carry 93 such bottles.
According to Sun, the larger restaurant chains in China are held by corporate entities while most overseas Chinese restaurants tend to be family-run set-ups that are more conscious of costs and overheads, such as alcohol licences. To get them on board this liquor train, they need to provide only internet access and power for the vending machines, and they can include Moutai Bulao on their menu.
Sun is betting that by having more efficient logistics, he can keep his costs low, and then by stimulating higher volume, the margins will follow, so much so that even if he sells a bottle a day, he is profitable already.
‘Tipsy time’
As Sun tries to grow sales of baiju outside China, he is also aiming to introduce a different product in China at the same time. On Feb 1, AEI announced the launch of a new beverage brand, Vrai, that it holds distributorship rights to.
This ready-to-drink beverage is described as an organic premium hard seltzer, and is the first and only vodka-based organic alcoholic beverage. Vrai comes in a variety of flavours such as green tea, tangerine and paloma. Sun believes Vrai can meet the region’s growing demand for healthier premium alcoholic cocktails over cheaper alternatives.
According to Sun, the consumption of mainstay alcoholic drinks such as beer, wine and baijiu is mainly in the evenings, not during the day. He says that ready-to-drink beverages like Vrai gives consumers the “kick” from the drink’s alcohol, but yet offers a healthier alternative compared to beer. Sun adds that Vrai will be marketed in China as a beverage for what he calls “teatime” — from morning to just before dinner. If Sun can have his way, “teatime” can become “tipsy time”.
Sun, citing industry research, notes that the market for such hard seltzer drinks is going to see faster growth relative to the overall market. Research by Jeffries says that worldwide sales of hard seltzer grew 226.4% in 2019, whereas beer grew by less than 1%. Jeffries also forecasts that hard seltzer sales will grow from US$3.5 billion ($4.6 billion) in 2020 to hit US$6.5 billion by 2024.
Sun expects Vrai to become “a major force in the market and gain significant market share” by leveraging on its first-mover advantage in the Asian markets. He is planning to launch Vrai in Asia markets where Singapore will be the first stop, followed by China, Hong Kong and Vietnam.
The way Sun sees it, various beverage companies such as Red Bull have their respective “flagship” products. For AEI, it is Vrai to spearhead its growth in China, and for outside China, Moutai Bulao, he says.
Synergies
Now, even as AEI pivots into the beverage industry, the original aluminium business will remain, says Sun. Back in November 2019, AEI announced the divestment of its aluminium business to former CEO Ian Tan Chu En and his wife Sinta Muchtar for $6.4 million. According to AEI then, given the “lacklustre outlook” of its core electronics and precision engineering businesses, the sale will help “streamline” AEI’s bid to move into new business areas. Three months later, as the Covid-19 pandemic unfolded, the sale was put on hold, citing “challenging and uncertain economic conditions caused by the outbreak of Covid-19”.
Sun maintains that there are synergies between distributing alcohol and producing aluminium. Over the years, AEI has built up a logistical and trading network which will come in useful. “MTBL would not need to allocate additional resources in this aspect,” he explains.
Sun is upbeat about the company’s prospects. “MTBL is aimed at promoting baijiu overseas. Vrai is a product that targets the Chinese market and globally. If Vrai as AEI’s flagship product penetrates the Chinese market, sales growth will be very encouraging. Coupled with international baijiu sales, which is expanding, what do you think the future of AEI will be?” he says.
