China Securities Co., Ltd.: The turning point of the current liquor adjustment period is approaching, and the liquor sector is ushering in a cyclical bottom opportunity for allocation.

China Securities Co., Ltd. released a research report stating that the counter-cyclical view on high-end liquor companies' volume and price strategies, the fundamental turning point is imminent, and the current situation may be an opportunity to allocate at the bottom of a ten-year cycle. The "Five Bottom Stages" of the liquor industry (policy bottom, inventory bottom, sales bottom, batch price bottom, production and sales bottom) resonate with the "Three Lows and One High" in the capital market (low expectations, low valuations, low public funds holdings, high dividends). Combined with the market strategies that have been implemented recently, the bank believes that the turning point of this round of liquor adjustment period is approaching, with capital market expectations leading the way, and the liquor sector welcoming a bottom cycle allocation opportunity. Key points from China Securities Co., Ltd. are as follows: Review of 2012-2015: Testing the resistance of high-end liquor prices and volumes under the background of the ban on "Three Public Consumptions," the battle for premium pricing has laid the foundation for the high-end brand structure. At the end of 2012, the Central Committee's "Eight Rules" were implemented, leading to a sharp decrease in government-related liquor consumption, and the industry entered a comprehensive adjustment period. The battle for high-end liquor prices, the key price strategy changes at the beginning of the adjustment period, tested the pressure of brand value, and its impact runs through the volume and price strategies of liquor companies during the adjustment period. Review of 2016-2021: The rise of mass consumption, accelerated consumption upgrade, and simultaneous rise in high-end liquor prices and volumes. The new round of high prosperity in real estate in 2015, "Shantytown Redevelopment Monetization," and ample liquidity from 2020 to 2021 have boosted the manifestation of residents' wealth effects, improved corporate profits, and opened the road for high-end and concentrated consumption of liquor. Under the driving concept of "drink less, drink good quality liquor," top-quality brands have achieved a simultaneous increase in volume and price. Review of 2022-2025: The liquor industry gradually transitions from a phase of capacity to a phase of contraction, with leading liquor companies achieving performance growth through extremely careful operation, but prices are under pressure due to sales pressure. Since 2022, macroeconomic indicators such as social retail, CPI, PPI, and real estate investment have gradually weakened, signaling a transition in demand from the old to the new energy. By 2025, with the implementation of a new liquor ban, leading liquor companies have achieved income growth through market expansion and increased inventory from 2022 to 2024, and by 2025, overall performance growth has been downgraded. During this period, the upward channel of high-end liquor prices is blocked, and price transmission is weak. Investment recommendations: The "Five Bottom Stages" of the liquor industry are approaching, and the cyclical turning point is foreseeable: In the short term, consumption restrictions at the policy level are gradually relaxing, with a clear trend of marginal improvement, and the most pessimistic moment for liquor sales has passed. With the marginal improvement of PPI and the implementation of stimulus measures to boost domestic demand, liquor sales are expected to bottom out in the middle of the year. Liquor companies are in a phase of clearing performance and removing inventory from channels, with generally cautious expectations for the Spring Festival and 2026. Coupled with the "siphon effect" of the Spring Festival, inventory digestion may accelerate, enhancing channel health. In the medium to long term, the recent adjustment in Moutai's product strategy accelerates the appearance of the batch price bottom, with iMoutai serving as a direct sales engine and channel marketing transformation. Even if Feitian increases production while batch prices soften, the deviation relative to 1499 yuan is expected to be controllable, and the batch price bottom of the industry is approaching. As for market concerns about future consumer demand, the exit of small and medium-sized enterprises and the suspension of capacity expansion by leading companies, the bank expects that when liquor production falls below 4 million kiloliters in 2025, it will be the bottom, and demand for liquor in specific scenarios domestically remains essential. With liquor companies' marketing strategies transitioning to better align with the preferences of Generation Z, the fundamental of liquor consumers remains relatively solid. The liquor sector's "Three Lows and One High" highlight its allocation value. The capital market's expectations for the liquor industry have been weakening continuously since 2021, with negative annualized returns. The valuation level and public funds holdings of the liquor sector are both low, and leading liquor companies are enhancing dividend returns and market value management, making the liquor sector's allocation cost-effective. The historical percentile of the liquor sector is within the bottom 15%, providing support for the sector's valuation bottom. From a fund perspective, the proportion of public funds holdings has been continuously weakening, with the liquor sector accounting for only 5.52% of public fund holdings at the end of the third quarter of 2025. If passive fund holdings are excluded, the active fund holdings of the liquor sector will enter a phase of underweighting in the second quarter of 2025, making the sector's funds relatively clean. In addition, listed liquor companies have responded to policy calls by committing to dividend payout ratios and amounts, emphasizing investor returns, actively participating in market buybacks, and stabilizing stock price trends through increases in major shareholder holdings, stabilizing market expectations. High-end liquor is a barometer of industry cycles, and is expected to rebound before the industry hits bottom. Reviewing the stock price performance of the liquor adjustment period from 2013 to 2015, leading liquor companies are the core indicator of the industry cycle bottom, being the first to reach the fundamental bottom and stock price rebound. In the liquor cycle of 2026, with recent significant adjustments in business strategies and product pricing logic, as well as cautious expectations for the new year, in resonance with the "Five Bottom Stages" in the industry and the "Three Lows and One High" in the capital market, the bank is optimistic that the stock prices of high-end liquors will outperform the industry. Risk factors: Recovery of demand falls short of expectations, and economic growth has slowed in recent years due to macroeconomic factors, impacting income growth and the pace of improvement in short- to medium-term resident income and consumption power; Inventory digestion of liquor falls short of expectations, as liquor is currently in a phase of inventory clearance, and if sales recovery falls short of expectations, the time to reach the inventory bottom will be extended, prolonging the industry cycle turning point. Continued lackluster demand for high-end products will put pressure on high-end prices. Food safety risks, food safety issues have always been a concern for consumers in recent years, although industry chain companies continue to improve production quality control levels, the long industry chain and involvement of multiple links and companies still pose risks in the aspect of food quality and safety.