Sealand: Leading Baijiu companies are expected to restart growth by increasing market share, maintaining industry "recommended" rating.

Sealand released a research report stating that in this round of the liquor market cycle, poorly managed and weak fundamental liquor companies will accelerate their exit, while liquor companies that face cyclical challenges head-on will be worth a higher certainty premium, which can be seen as better returns than national bonds + implied call options, maintaining a "recommended" rating for the liquor industry. The first is the size priority, strong operational certainty, and leading brand value liquor companies, with Kweichow Moutai (600519.SH) being the top recommendation; the second is liquor companies with low expectations and stable fundamentals. The third is to focus on opportunities for the mid-high-end market reversal. Sealand's main points are as follows: Cycle review: Three stages of the liquor market, from prosperity to certainty bottom From 2016 to mid-2021, benefiting from demand expansion + supply restrictions + channel amplification financial attributes, the industry achieved a prosperous market with a six-fold increase in the Shanghai Stock Exchange Baijiu Index. From mid-2021 to mid-2025, channel pressures due to supply-demand mismatch are evident, and valuations (PETTM) continue to be revised downwards. By mid-2025, demand will be under pressure, liquor companies will proactively relieve pressure, accelerate their exit, and the industry's supply and demand will reverse again, with inventory being cleared, and clear signs of bottoming out. The agency believes that liquor companies currently focusing on clearing inventory will likely pass through the slow season pressure period in Q2 2026 smoothly, with a significant increase in sales expected in H2 due to the low base in the previous year. By 2027, supply and demand will rebalance, prices are expected to enter an upward trend, and liquor company financial statements are expected to be orderly repaired. The agency recommends focusing on channel cash flow, re-stocking intentions, and price recovery as key signals in the future. Cycle interpretation: From prosperity to elimination, seeking true value through fire refinement Current market pessimism is focused on the trend of short-term demand pressure and long-term total volume decline, neglecting its inherent structural opportunities. Sealand believes that the concentration trend of this round of famous liquor companies' income and profits has not only not ended, but will also accelerate, driving the next round of scale growth, with brand rankings shifting from price to scale orientation. For liquor companies, on the supply side, they need to pragmatically recognize the reality, manage the volume and price of mid-high-end products, stabilize the fundamentals, accelerate the layout of mid-to-low-end products, and explore potential gold mines; on the demand side, they need to follow the trend of "happy self" consumption and seize the opportunity for C-end expansion. On the distribution side, it is important to focus on the ecosystem development of distributors and encourage them to shift towards service providers. In this round of the cycle, only liquor companies that actively adapt to the trend and cultivate their internal strength can stand out. Investment speculation: Dividend weighing value, concentration increases accelerate expected revisions The difference in valuation between the two rounds of cycles lies in the fact that in this round of the cycle, operational certainty and dividends support the valuation of companies, with the bottom valuation center moving up to around 16 times. Looking ahead to valuation interpretation, the industry's pricing focus is shifting from short-term derivatives to long-term value integration, with a cash flow discount mindset that is more in line with the white liquor industry's transition to high-quality development. Although value weighing is the final valuation logic, Sealand believes that the growth of leading liquor companies is far from over, with the top 6 companies currently accounting for approximately 48% of income, with reference to the high concentration levels in mature consumer goods sectors, where concentration levels are often over 80%, the industry's concentration is far from over, and leading liquor companies are still expected to restart growth by increasing their market share, leading to an accelerated increase in valuation. Risk warnings: policy risks, consumption recovery falling short of expectations, price fluctuations causing market panic, macro liquidity tightening, liquor company reforms falling short of expectations.