Guotai Haitong: Short-term beer industry prosperity under pressure, suggesting increased holdings in strong regional wine companies and industry leaders.

Guotai Haitong released a research report stating that the changing demand for beer is nurturing historical opportunities for category innovation, the domestic craft beer space is vast, and leading wine companies are expected to simultaneously enjoy dividends. The channel revolution led by new retail is expected to help regional wine companies break through weak markets and open up single-product ceilings. In the short term, the industry's prosperity is under pressure, focusing on incremental opportunities under category innovation and channel revolution. It is recommended to increase holdings in strong regional wine companies driven by large single products and abundant performance elasticity, as well as industry leaders with sustained high-end, stable performance, and considerable dividend yields. Guotai Haitong's main points are as follows: Beer may have entered a new normal of stock competition, focusing on structural opportunities for category and channel innovation. Since 2023, China's beer sales have been slowly declining, and following overseas experience, they may enter a long-term declining stage following population trends. In terms of prices, in 2024, due to lower-than-expected demand recovery and inflation decline, the ASP growth rate of leading companies slowed to 0.4%. In terms of concentration, according to the bank's calculations, the CR5 industry sales in 2024 are expected to decrease by about 3.5 points year-on-year to around 75%. At the same time, category innovation represented by craft beer and channel revolution represented by instant retail are thriving, and may become the core clues for the industry's next round of development. Craft beer rising: Changing demands nurture opportunities, leading wine companies enjoy dividends Inter-generational consumer changes often foster historically significant category innovation opportunities, and domestic beer may be facing a similar turning point. Craft beer is the core category trend in the industry, and the bank estimates that the current penetration rate of craft beer in China is about 3%, still far behind the 5-15% level in developed countries like Europe, America, and Australia. Currently, there is no clear distinction between craft and non-craft beer in China; craft beer is more of a label serving the high-end and differentiated narrative of beer, where large companies, small factories, channels, and chained formats compete. Looking ahead, the bank believes that: 1) The concentration of craft beer may be limited in the medium term. Supply chains and the mass market will accelerate towards concentration, flavor innovation and segmented scenes may still be dominated by small and medium brands, and change and niche are the moats. 2) Leading wine companies are expected to fully benefit from category dividends. China has not yet imposed requirements on the scale and independence of craft beer companies as in Europe and America. Beer giants can also compete in craft beer. Considering brand influence and scale effects, large companies may have a late-mover advantage. Channel revolution: New retail accelerates channel parity, medium and large wine companies still have moats In recent years, the new retail channels for beer have grown rapidly, driven by consumers' increasing demand for convenience, rationality, and differentiation. Instant retail provides "real-time" and "differentiated" value, while warehouse membership stores cater to the cost-effectiveness demands of the middle class through precision selection and economies of scale. The bank estimates that current new retail channel beer sales amount to about 30 billion yuan, with a penetration rate of about 6% and an annual growth rate of about 20%. The bank believes that the most direct impact of new retail on the industry lies in accelerating channel parity, weakening the traditional channel advantages of leading wine companies, making it easier for regional wine companies to expand in weak markets, and providing opportunities for small and medium-sized wineries to digest excess capacity through OEM. Furthermore, the bank's case analysis shows that even in new channels, brand awareness, quality control, and economies of scale, especially for medium- and high-end beer from large companies, remain important competitive advantages. If they actively embrace and respond flexibly, they still have the potential to increase market share. Finally, the bank does not recommend extrapolating channel changes linearly, referencing the rapid decline of community group purchases after the epidemic. If future economic environment and inflation levels undergo trend changes, the high-growth trends of new retail channels and non-alcoholic beverages may not necessarily continue. Risk factors: Slowing economic growth, increasing industry competition, rising raw material costs, and food safety issues.