China Galaxy Securities: Next year, the food and beverage industry will still be dominated by structural opportunities, and new consumption will see internal rotation.

China Galaxy Securities released a research report stating that the performance of the food and beverage industry in 2025 was relatively weak, with adjustments in the Baijiu sector being the main reason, while the recovery trend of mass market products remains unchanged. The firm believes that in 2026, the food and beverage industry will continue to focus on structural opportunities: 1) new consumption still has sustainability, but there may be rotation within the sector; 2) some traditional consumption supplies are gradually being cleared, and demand improvement is expected to drive sector recovery, such as dairy products, frozen foods, etc. The firm believes that in 2026, there will be internal rotation in new consumption. The main points of China Galaxy Securities are as follows: 2025 Review: Weak industry performance, with Baijiu adjustments being the main reason, mass market product recovery trend unchanged Overall, in the first three quarters of 2025, the revenue of the food and beverage industry increased by 0.1% year-on-year, while profits decreased by 14.6% year-on-year, both slower than the same period last year. The industry index ranking in terms of year-to-date gains and losses among 31 sub-sectors is 31st. In terms of structure, the adjustment cycle of Baijiu was the main reason for the weak performance of the food and beverage industry. In fact, the long-term trend of mass market products remains unchanged, with H1 new consumption leading (functional drinks, konjac snacks, bulk channels, Sam's Club channels) and H2 traditional consumption recovering (frozen foods, etc.). 2026 Outlook: Structural opportunities continue, internal rotation in new consumption, bottoming out of traditional consumption If the macroeconomic recovery pace remains moderate in 2026, the firm believes that the food and beverage industry will continue to focus on structural opportunities: 1) new consumption still has sustainability, but there may be internal rotation within the sector; 2) some traditional consumption supplies are gradually being cleared, and demand improvement is expected to drive sector recovery, such as dairy products, frozen foods, etc. Unlike market views, the firm believes that there will be internal rotation in new consumption in 2026: 1) new channel direction, Sam's Club and snack wholesalers will switch from high-speed store opening logic to pattern optimization logic, and channel-owned brands and multi-category discount formats are expected to expand rapidly; 2) new category direction, konjac snacks and functional drinks will continue to thrive but attention should be paid to changes in competitive landscape, while healthy food and convenient food are expected to enter a stage of increased production. Baijiu: Expected to still be in an adjustment period, but gradually entering the bottoming phase The baijiu industry experienced deep adjustments in 2025, with supply-side clearance accelerating since Q3 2025, and only Moutai and Fenjiu among the top brands achieved positive growth. Looking ahead to 2026, the firm expects the industry to still be in an adjustment period, but gradually entering the bottoming phase, i.e. narrowing of sales and batch price declines + continued clearance on the reporting side, highlighting the long-term value of stocks. Referring to the previous adjustment period (2012-2015): in the first phase, sales and batch prices accelerated their downward trend, and liquor companies began to clear their reporting, leading to a significant drop in stock prices and valuations; in the second phase, while sales and batch price declines narrowed, liquor companies continued to clear their reporting, but by this time market expectations were already more abundant, and with continuous improvement in funding, stock prices began to recover in a low valuation background. Mass market products: Internal rotation in new consumption expected, bottoming out of traditional consumption In 2025, the fundamentals of the mass market products sector maintained a long-term recovery trend, with rotations between new and traditional consumption pushing the index into positive territory. Looking ahead to 2026, the firm believes there are still structural opportunities: 1) new channels: for snack wholesalers, focus on store-type companies, for Sam's Club channels, focus on upstream companies with SKU expansion space, in addition, channel-owned brands and multi-category discount formats are rapidly expanding, with opportunities in the upstream supply chain; 2) new categories, focus on changes in competitive landscape for konjac snacks and functional drinks, in addition, healthy food and convenient food are expected to increase production; 3) some traditional consumption supplies are gradually being cleared, and demand improvement is expected to drive sector recovery, such as dairy products, frozen foods, etc. Risk Warning Risks include insufficient demand recovery, continuous price declines, competition not improving as expected, channel reform having a greater impact than expected, and food safety risks.