Huachuang Securities: Cherish the certainty of leading food and beverage companies, select high-elasticity stocks with challenges reversed.

Huachuang Securities released a research report saying that currently, investing in the food and beverage industry is similar to a "call option": dividend yield provides sufficient safety margin, macroeconomic stability solidifies the bottom, and the profit potential comes from two aspects - one is the valuation improvement in a loose liquidity environment, and the other is the policy transmission leading to demand recovery. Leading companies with excellent long-term business attributes and outstanding competitiveness are currently in a rare period of certainty for investment, and based on the market's incremental capital structure, ETF funds entering the market will directly benefit heavyweight stocks such as Maotai, Wuliangye Yibin, Luzhou Laojiao, Fenjiu, Yili, and Haitian. Huachuang Securities' main points are as follows: Food and Beverage Sector: Bottoming out, clear upward trend, shedding burdens in 2024 and gearing up for 2025. Since the end of September, a series of macroeconomic policy measures have been introduced by the government, reversing the market's pessimistic expectations for continued weak demand and negative spiral in the performance of listed companies. With valuations having dropped significantly in the first three quarters of this year, the sector's bottom is believed to have been set, and the direction of marginal improvement is clear. Looking ahead to next year, seasoning, dairy, beer, and liquor companies have been clearing inventory and resolving balance sheet risks since 2024, and in 2025, each sub-industry is expected to gradually transition from inventory clearance to replenishment, with economies of scale expected to drive a cycle of profit forecast downgrades to upgrades. Additionally, B-side supply chain companies associated with dining, due to the lack of inventory cycles, are highly sensitive to the recovery of downstream dining demand and may directly benefit from macroeconomic stimulus policies such as dining vouchers, especially after significant adjustments to profitability expectations. Liquor: Valuations hit bottom in 2024 and are expected to bottom out in 2025. The industry is currently believed to still be in a phase of inventory clearance for the first half of 2025, with a potential industry expectation bottom by mid-year. Two key indicators are Maotai's ex-factory price expectations and the profit expectations of leading liquor companies. In terms of ex-factory price expectations, the industry is still in the destocking phase next year, with expectations for a continued decline in the ex-factory price of Pu'er. Considering Maotai's diversified channels and improved management capabilities, and looking at a decade of quantitative calculation based on indicators such as M2 and per capita disposable income from the previous cycle, the bottom of this round of Pu'er prices is estimated to be around 2000 yuan. Concerning profit expectations for liquor companies, the industry's pressure in 2024 has transmitted from off-balance sheet to on-balance-sheet, but shedding burdens is a prerequisite for moving onto a new path. The decline in the financial statement indicates that the adjustment period for the liquor industry is entering its final stage, with liquor companies in 2025 expected to focus on practical deceleration in profit targets. With the transmission of macroeconomic policies and their gradual effectiveness, it is expected that once the extent of profit downgrades in the first half of 2025 is clear, there will no longer be a deterioration in profit expectations, and a bottom in profit expectations will be seen. Drawing from the experience of the previous liquor cycle, valuations first turned in mid-2014, industry expectations turned in mid-2015, and fundamentals (ex-factory prices and performance) accelerated in 2016. In terms of industry structure, dominant players with strong control over different price segments and regions, such as Maotai and Wuliangye, have higher profit target confidence, while other liquor companies are in the process of adjusting and preparing for new opportunities; strong management abilities like Laofanjia and strong brand power like Fenjiu may lead the way in completing their adjustments. Mass Products: The dairy, seasoning, and yeast industries have shifted to the right side, and the bottom of the beer industry has been reached. The reversal of mass products goes through three stages: the first stage is inventory clearance and the removal of pressure on financial statements, even though demand is still under pressure, marginal profits have improved; the second stage is waiting for demand recovery and accelerated revenue; the third stage is optimistic anticipation of strong demand pushing for supply shortages, leading to cost increases in the upstream and price hikes downstream. The industry's structure determines the speed of inventory clearance, with leading seasoning company Haitian and Angel Yeast Co., Ltd. having cleared inventory in the first half of the year, indicating an upward cycle, while the dairy industry with a duopoly structure has accelerated inventory clearance in the second quarter, showing clear improvement from the third quarter onwards. As for the beer industry, dominated by an oligopoly, the leading company has increased its marketing efforts in the second half of the year and accelerated inventory digestion, positioning it well for 2025 with low inventory and a weak base. Additionally, B-side supply chain companies in the dining sector are not affected by inventory cycles, and their demand recovery is highly sensitive, with frozen foods, sauces, and other companies likely to experience a turnaround in a low base level. Focus is also placed on the market response to new products launched by BaRan whisky. Investment Recommendations: Seize the opportunity for certain high-elasticity configurations of leading companies, with a focus on mass products reversing their fortunes. Currently, investing in the food and beverage industry is similar to a "call option": dividend yield provides sufficient safety margin, macroeconomic stability solidifies the bottom, and the profit potential comes from valuation improvement in a loose liquidity environment and the transmission of policies to drive demand recovery. Leading companies with excellent long-term business attributes and outstanding competitiveness are currently in a rare period of certainty for investment, and based on the market's incremental capital structure, ETF funds entering the market will directly benefit leading companies such as Maotai, Wuliangye, Fenjiu, Yili, and Haitian. Specific target selection includes: Liquor: For certain configurations, Maotai and Wuliangye are recommended, while for potential high-elasticity reversals, Laofanjia and Fenjiu are preferred. In terms of profitability targets, Maotai and Wuliangye are recommended as they have already reached the bottom, with Gujing expected to maintain double-digit growth next year. In terms of high-elasticity reversals, Laofanjia, Fenjiu, and Jiangsu King's Luck Brewery Joint-Stock are preferred, with focus on rare liquor brands. Mass Products: Embrace the dairy industry, beer and yeast, and closely monitor the turnaround in the catering supply chain with the launch of new products by BaRan. Combining the medium-term inventory cycle and micro-operational cycle, a combination of leading dairy companies Yili and Mengniu is recommended, with a focus on New Hope Dairy; for beer, the leading companies Qingdao and CR Beer are strong recommendations; the leading yeast company Angel will bid farewell to the peak of its turnaround period and enter a period of cost reduction, with a clear trend of improvement in the next 1-2 years. In addition, opportunities for elasticity in B-side catering supply chains are seen in the selection of Baoli, Lihao, and focusing on feedback on the new products from BaRan whisky. Continuous strategic recommendations include Dongpeng, Nongfu, Haitian, and Anjing, with a focus on Chinaking and Xianle. Risk Warning: Lower-than-expected end-demand, increased industry competition, etc.