Industrial: Should the liquor sector rise?

Industrial released a research report stating that the current liquor industry has entered a structural bottoming phase, with clear fundamentals recovery and valuation repair trends in the sector. Furthermore, the specific risk disturbances facing various liquor enterprises are expected to be effectively mitigated in the first half of this year. The key timing for stock price rebound is expected to occur after the second quarter, as industry sales are anticipated to achieve both month-on-month and year-on-year improvements post-May. Core single product pricing may successfully withstand the off-peak season test. Currently, the sector's valuation is at a low level with sufficient safety margin, presenting opportunities for high quality to low quality rotation, allowing for early value positioning. As the industry continues to recover, the sector's rebound space is expected to gradually open up. Key points from Industrial are as follows: Current background: The fundamentals have been bottoming out for nearly half a year, with over half of the financial statements cleared, chips relatively clean, and the bottom basically established. Fundamental perspective: From last May, when policy impacts led to extreme pressure on quantity and price, to now where fundamentals have been stabilizing for nearly half a year. In terms of sales volume, the market has not deteriorated further since the beginning of the year, and channel sales have shown improvement month-on-month, with year-on-year improvement expected in the second half of the year. For pricing, leading company Maotai's proactive reforms have been effective, with prices rising following the Spring Festival, reaching a low point after a cycle of increases. Additionally, with the normalization of e-commerce promotion under the "anti-inner loop" background, except for individual liquor companies digesting historical issues, the risk of price declines in the off-peak season sharpens further narrowing, bringing prices to a stable range. Financial statement base: Leading liquor companies started to slow down in the second half of 2024, accelerating clearance from the second and third quarters of 2025, with Q1 2026 showing a continued decline in performance, raising the reliability of financial statements. Market concerns about inventory, historical baggage, and high base numbers have gradually been alleviated in recent years, with half of the companies expected to achieve positive growth or even higher in financial statements due to the lower base in 2025, especially in the second half of 2026. Chip structure: Liquor sector stocks have fallen by more than 60% from the peak in 2021, lower than the low point influenced by the alcohol ban in Q2 2025, and below the pre-stimulus policy level. Fund holdings continue to decline, with mainstream consumer-oriented funds transitioning in Q2 2026, further optimizing the chip structure. Liquor sector trading volumes accounted for only about 0.1%-0.2% of A-shares from 2025 to date, with most holdings mainly in some long-term holdings and insurance institution OCI accounts. Short-term trading chips have been cleared, limiting the downward potential. Is the bottom confirmed? Is the safety net sufficient? Viewed from three perspectives, the sector is at a value bottom with sufficient safety margin: 1) Based on the bottom-line profit of liquor companies, the valuation levels corresponding to the actual performance are mostly in historically low levels; 2) Based on the unique business model of the liquor sector (price and value based on inventory), most liquor companies' PB ratios are less than 1, showing cash flow and net worth, with a safety cushion; 3) Based on dividend yield, as of May 28, 2026, most liquor companies' dividend yields fall within the 3%-6% range, enhancing the attractiveness of medium- to long-term allocation. What signals to watch for the rebound? Observe sales, pricing, and financial statements in three dimensions. By closely monitoring the marginal changes in sales, pricing, and financial statements, the rebound signals in the sector can be grasped: 1) Concerning sales, with industry supply rationalization and gradual recovery of consumption scenarios, achieving year-on-year growth in sales would be a significant signal of sector stabilization, reversing market pessimism; 2) In terms of pricing, Feitian's pricing has stabilized above 1600 yuan since the beginning of the year, providing a safety margin. The prices of single products in the thousand-yuan price range have fluctuated due to historical issues, but are expected to stabilize under company intervention, anticipating stable price levels in the peak season with overall volume and price control, boosting industry confidence and directly influencing stock prices; 3) In terms of financial statements, in recent years, most liquor companies have had channel pricing pressure and leveraged operational models, causing concerns about their performance. However, since last year, most companies have entered a financial statement clearing stage. If this continues, clearing historical burdens, financial data can truly reflect the fundamentals, and Industrial predicts that in the second half of 2026, some companies are expected to achieve positive growth or even higher, serving as a catalyst despite base effects. How will the pace and scope of this round of sector upturn unfold? The bank expects a three-stage scenario: In the first stage, with high and low growth, chips are battling. In the first half of the year, while the industry is bottoming out, most liquor companies are still in the process of clearing their financials, with recovery yet to be reflected. The market is driven by chip battles, with opportunities for high-quality to low-quality rotation, but lacking performance catalysts, the sector is likely to maintain a range-bound trend. In the second stage, with the continuous improvement of macroeconomic data such as CPI and PPI from the third quarter, consumer confidence returning, and clear signals of industry margin recovery, the sector will enter a valuation repair trend. Considering that current liquor companies' valuations are generally between 13-15X, it is estimated that the repair space in this stage will be around 10%-20%. In the third stage, from the fourth quarter to the first half of next year, entering the phase of financial statement growth, the dual impact of catalyst performance and valuation repair will trigger the main uptrend, with most liquor companies expected to increase performance by about 10% and valuation by about 30%, leading to a stock price increase of approximately 40%-50%. Risk warnings: Macroeconomic fluctuations affecting consumer consumption; changes in future liquidity margins; intensifying industry competition.