Guosen: More signals of the bottoming of the liquor industry, the sector enters the consolidation phase.

Guosen released a research report stating that at the current point in time, there is still disagreement in the investment opportunities in the liquor sector. On one hand, the performance of liquor companies in 2025Q3 is expected to see a significant decline compared to the previous year. On the other hand, valuations are at a low position, with positive factors increasing on both the supply and demand sides. 1) Combining the double sales during the festivals to observe the industry's demand recovery, the market has fairly sufficient expectations for performance and prices. Valuations will improve as demand improves, and sensitivity towards policy expectations and liquidity improvements is higher, belonging to the first phase, priced by dividend yield. 2) Looking ahead to the second phase of valuation recovery, as industry supply and demand relations improve and prices and performance indicators are met, the market's "long-term faith" in liquor assets will return. The bank believes that there are more signals of the industry bottoming out, and the sector is entering a strategic layout phase. Guosen's main points are as follows: Stock price and performance rhythm Most companies confirmed their stock price bottom in 2013Q4-2014Q1. Since 2013Q3, the decline in performance has expanded, and the business climate has continued to grind at the bottom, but stock prices have shown a moderate increase following the overall bull market. Our bank found that the decline in performance in 2013Q3 further expanded, but after the release of the third quarter report, stock prices remained relatively stable, with most companies generating absolute returns within one month after the disclosure. The reasons include: 1) the digestion of expectations for the slowdown in performance has been sufficient, with liquor companies falling by 30-55% from the beginning of 2013 to the third quarter report; 2) the reinforcement of economic reform expectations from 2013Q4, short-term liquor business climate continues to grind at the bottom but the industry logic remains unchanged in the medium and long term, valuations in the sector are gradually recovering along with improved liquidity; 3) the narrowing of the year-on-year decline in high-end wholesale prices further strengthens the bottoming signal, such as Fenjiu's narrowing decline in wholesale prices in 2013Q4, and the stock price bottomed and rebounded in 2014Q1. Furthermore, the stock price performance of individual companies is still closely linked to their fundamentals, including 1) regional leaders such as Gujing, Laobaigan, and Yanghe seeing smaller declines than the overall market, showing excess returns relative to the sector; 2) Wuliangye Yibin saw a rebound in the month following the increase in clearance efforts in 13Q3, reflecting market confidence in the long-term operations of high-end liquor. Business strategies of liquor companies Leveraging channels to amplify brand and product advantages is an unchanging proposition in the adjustment cycle. During the adjustment phase, the business strategies of liquor companies deliver signals of changes on the supply side. In the 2013-2015 period: 1) high-end liquor emphasized the maintenance of brand strength, with Moutai shifting its focus back to expanding clientele, and Guojiao 157's wholesale prices exceeding Wuliangye Yibin's; after further highlighting supply and demand issues, companies began utilizing tools to leverage channels and products, such as Moutai allowing bills, opening up distribution rights, and supplementing income through custom-made liquor, while Wuliangye Yibin, facing channel pressures, actively subsidizes distributors and establishes a platform operator system, and Laolao strengthened control of distribution and sharing profits to ensure channel profits. 2) Regional leading liquor companies retreated to their base markets, shifting focus from outside the province to a single point, with Yanghe and Gujing strengthening their presence in lower-tier markets and cultivating group buying channels, while Fenjiu increased merchandising, also adopting a custom-made liquor development model. 3) Expansion-oriented mid-range liquor made adjustments earlier with larger changes, in line with industry trends, with brands like Shede, Jiugui, and Sichuan Swellfun focusing on increasing the volume of mid to low-end products and targeting popular consumer scenarios, with Shede gradually starting to recruit small businesses/group buyers/outsider distributors, and Jiugui Liquor focusing on Hunan province as a key area. Liquor companies have weakened their growth tools since the beginning of this year, with mainstream companies starting to release pressure through channels and products, similar to the last cycle, which can be seen as further accelerating the bottoming out of the supply side adjustment. Risk warnings: Economic and demand recovery below expectations; slow inventory clearance speed, sustained decline in prices of main products; deterioration in competitive landscape leading to excessive investment costs, damaging net profit margins of liquor companies; food safety issues, etc.