Guotai Junan: Policy expectations warming up, the liquor sector is expected to usher in a round of valuation recovery.

Guotai Junan released a research report stating that from the performance of the Spring Festival, the demand for liquor is still weak, and overall stable after the festival. The recent stock price trend has basically reflected market pessimistic expectations. With the expected policy improvement, the liquor sector is expected to usher in a round of valuation repair, and it is recommended to increase holdings: 1) Good-selling leading companies such as Shanxi Xinghuacun Fen Wine Factory(600809.SH), Anhui Yingjia Distillery(603198.SH), etc. 2) Relatively stable companies such as Wuliangye Yibin(000858.SZ), Kweichow Moutai(600519.SH), etc. Guotai Junan's main points are as follows: Policies are becoming more positive and market expectations are rising. Approaching the Two Sessions, recent macroeconomic policies have turned positive. On February 10th, the State Council meeting discussed boosting consumption-related work and emphasized the importance of boosting consumption to expand domestic demand and strengthen the domestic economic cycle. Shanghai once again released 500 million yuan in service consumption vouchers with redemption starting from March 1st, including 360 million for catering with a threshold of 300 yuan (get 90 yuan off for spending over 300 yuan), which is expected to boost catering-related consumption. At the same time, with real estate being an important cyclical sector and some regions seeing warming property transactions in January, the industry's outlook has received temporary support, boosting market sentiment. With the impact of products like DeepSeek, foreign investors are becoming more active, and Goldman Sachs disclosed that global hedge funds' net buying of Chinese assets last week reached a four-month high. With policy factors expected to drive cyclical assets to revalue. The fundamentals of the liquor industry are stable. The Spring Festival performance of the liquor sector in 2025 met expectations, and post-festival operations were generally stable. According to channel surveys, the decline in sales of liquor during the Spring Festival is expected to be within 10%. Considering the decrease in wholesale prices year-on-year, it is predicted that the decline in sales revenue will be greater than the decline in sales volume. The performance of lower-end liquor is expected to be better than higher-end and mid-range liquors. Prices of Maotai and Wuliangye after the Spring Festival remained stable, outperforming prior pessimistic expectations. Currently, liquor industry inventories remain at a high level, prompting liquor companies to focus on inventory reduction and channel profit issues. Since January, brands such as Wuliangye Yibin, Fenjiu, Lidu, Zhenjiu, Jiangsu King's Luck Brewery Joint-Stock, and Yanghe have successively started controlling supply, with Wuliangye Yibin preparing for reduced production. Most mid-range brands have released less inventory during the peak season, and there has been moderate loosening of payment requirements. It is expected that the industry will experience channel profit bottoms, inventory bottoms, and performance bottoms in succession, gradually stabilizing. The sector is at a relatively low level and is expected to undergo a valuation repair. Since Q3 2024, the growth rate of the liquor industry's performance has marginally slowed down, with weakening channel capacity. Healthy growth has become an industry consensus. The progress of inventory reduction was mediocre during Q4 2024 and Q1 2025, and recent stock price trends have largely reflected pessimistic expectations. After recent adjustments, as of the closing on February 12th, the corresponding 2025E PE ratios for Kweichow Moutai/Wuliangye Yibin/Luzhou Laojiao were 20X/15X/12X respectively, and Shanxi Xinghuacun Fen Wine Factory/Anhui Gujing Distillery/Anhui Yingjia Distillery/Jiangsu King's Luck Brewery Joint-Stock were 15X/13X/14X/14X respectively. Valuations have fallen back to relatively low levels, and under policy stimulation, they are expected to undergo a valuation repair. Risk warning: drastic fluctuations in wholesale prices, slower-than-expected demand recovery, food safety risks.