CMSC: The liquor industry is emerging from its darkest moment, focusing on companies that are emerging from turning points.

CMSC released a research report stating that the single-quarter revenue of 25Q4 decreased by 30% year-on-year, marking the deepest adjustment in this round. In 26Q1, the revenue/profit decline narrowed, and the industry emerged from its darkest moment. The continuous contraction and clearance of channels in 26Q1 has left overall contract liabilities still weak, while the rise in accounts receivable reflects liquor companies proactively relieving pressure on distributors and easing distributor financial stress. As for holdings, the proportion of liquor holdings continues to decrease, with Kweichow Moutai (600519.SH) and Wuliangye Yibin (000858.SZ) initiating additional holdings. The bottom of the sector has been identified, with constraining factors gradually fading away, emphasizing companies that are reaching the turning point. Key points from CMSC: The single-quarter revenue of 25Q4 decreased by 30% year-on-year, marking the deepest adjustment in this round, with the revenue/profit decline narrowing in 26Q1 as the industry emerges from its darkest moment. In 2025, the liquor industry's revenue/net profit/cash return were 361.85/126.37/428.71 billion yuan, down by 18.2%/-24.2%/-10.3% year-on-year. In 25Q4, the revenue/net profit/cash return for the quarter were 71.93/18.83/86.61 billion yuan, down by 29.6%/-46.1%/-29.1% year-on-year, with the revenue decline exceeding any quarter of the adjustment cycle from 2012-2015. Moutai saw its net profit decrease for the first time in 25Q4 (-30.3%), while Wuliangye Yibin's annual revenue decreased by 54.6% year-on-year. The industry's revenue/net profit/cash return in 26Q1 were 132.63/52.02/124.45 billion yuan, down by 0.7%/-1.8%/-18.6% year-on-year. The revenue and profit decline narrowed to near parity (excluding Wuliangye Yibin, the revenue/profit in 26Q1 decreased by -5.7%/-9.4%), with Moutai leading the way in recovery with a +6.3% growth rate in 26Q1. After experiencing the darkest times in 25Q4, the sector's financial reports in 26Q1 have reached the deepest bottom and are expected to show a gradually improving trend in each quarter. Subsidiary operating performance High-end liquor Moutai, with its brand capabilities and iMoutai channel reform, experienced a slight annual decline of 1% and was the first to return to growth in 26Q1, gradually benefiting from the reform. Wuliangye Yibin significantly reduced its historical burdens based on a prudent principle, leading the industry in clearance efforts, with positive feedback on sales in 26Q1. Laobiao saw its profits nearly cleared out in 25Q4, with the profit decline narrowing in 26Q1 but still in the process of adjustment, with a high dividend payout ratio providing bottom support. The semi-high-end Fenjiu, through scaled-up production and expansion outside the province, achieved the only positive growth for the full year, starting its clearance process in 26Q1 as scheduled but with a high-quality cash return and ample cash reserves. Sichuan Swellfun's decline narrowed as its inventories returned to normal, with sheders returning to positive growth within the province, and Jiugui Liquor's "Freedom Love" series performance shining. Among regional liquor brands, Yinfeng and Laobaigan both reported positive financials in 26Q1, with Guling getting through the toughest times, King's Luck showing strong resilience and significant cash reserves, and Yanghe and Kouzi still in the adjustment phase. Jinhui Liquor's operating resilience is evident. Continuous channel contraction and clearance in 26Q1 leaves overall contract liabilities still weak, while the rise in accounts receivable reflects liquor companies proactively relieving pressure on channels and easing distributor financial stress. At the end of 26Q1, the sector's total contract liabilities were 410.8 billion yuan, down by 6.2% year-on-year, with significant growth in reserves for Wuliangye Yibin/Fenjiu/King's Luck, and increased channel binding capabilities for top enterprises. Liquor companies in 25Q's were pragmatic and cautious, with the vast majority not meeting annual targets. In 26Q's, most companies no longer set specific growth targets, placing market health above scale growth. During the adjustment phase, gross profit margins were slightly under pressure (primarily due to structural changes), with a significant increase in expense ratios due to rigid costs and declining revenue, leading to a distorted profit achievement in 25Q4, which has since returned to normal levels in 26Q1 under seasonal effects. Portfolio analysis: Proportion of liquor holdings continue to decline; Moutai and Wuliangye Yibin initiate additional holdings in 26Q1. In 26Q1, the proportion of liquor holdings in portfolios fell by 0.1 percentage points to 3.4%. The current proportion of liquor holdings has fallen by 11 percentage points from its peak, exceeding the adjustment in 2018. Moutai and Wuliangye Yibin actively increased their holdings, while Fenjiu, Laobiao, and Guling continued to reduce theirs. Active funds tended to buy Moutai when adding positions. Investment advice: Bottom has been identified, constraining factors are gradually fading, focus on companies reaching the turning point. Strongly recommend Kweichow Moutai, which is crossing the cycle (reform dividends released, market price adjustment path cleared), Shanxi Xinghuacun Fen Wine Factory, which is increasing market share against the trend (still has room for national expansion, growth continues after adjustment), and Anhui Yingjiagongjiu, which is the first to emerge from the adjustment (26Q1 growth exceeds expectations, Dangcang series continues to be strong). Recommend Luzhou Laojiao, which has restrained management (high dividend yield, clear strategic goals), and Anhui Gujing Distillery, which has a clearly distinguished position in the province (toughest times have passed, solid base). Pay attention to Hebei Hengshui Laobaigan Liquor and Jiangsu Kings Luck Brewery Joint-Stock, which are still gaining market share. Risk Warning: Economic disruptions, lower-than-expected demand, increased competition, channel clearance not meeting expectations.