Guotai Haitong: Baijiu is expected to present structural opportunities, recommending to first clear the targets.

Guotai Haitong released a research report stating that the bottom characteristics of the consumer sector are becoming evident, with pessimistic expectations for the fundamentals fully reflected. The proportion of holdings in liquor funds has fallen to a historic low. With style rebalancing and valuation recovery, it is expected to present structural opportunities. Currently, the liquor industry is at the bottom of its cycle, with continued adjustments in financial reports. The proportion of fund holdings has dropped to a historical low, and the valuation percentiles are relatively low, with liquidity, policies, and pricing expected to act as catalysts (such as recent price increases in high-end liquor). It is recommended to clear the targets in advance. The main points from Guotai Haitong are as follows: Performance clearing, the industry reaching the bottom. The liquor industry is currently at the bottom of this cycle, with financial reports adjusting for several consecutive quarters. Based on disclosed semi-annual performance forecasts and research findings, the bank expects that the financial reports for Q2 2026 will continue to show a clearing state, with only a few stocks likely to achieve a year-on-year level or positive growth. Meanwhile, liquor manufacturers are becoming increasingly rational, and the absolute volume of channel inventory is steadily decreasing, with the sharp price decline significantly alleviated. On the demand side, the overall performance of liquor in Q2 has been relatively weak, with moderate performance during the May Day and Dragon Boat Festival small peak seasons, and some scenarios have not yet fully recovered. It is widely believed in the industry that 2026-2027 will be a bottoming period, with the Mid-Autumn Festival and National Day in the second half of the year and the 2027 "opening red" being key points of observation. As the demand for liquor normalizes, the industry is expected to reach a turning point. Fund holdings have decreased to a low level, and micro-structural improvements are noted. In Q2 2026, the market style has been extreme, with the proportion of active equity funds holding food and beverage stocks dropping to 1.49%, a decline of 2.41 percentage points from Q1 2026, representing a significant reduction in allocation within the food and beverage sector. Specifically, the proportion of holdings in liquor has dropped to only 0.97%, a decrease of 1.93 percentage points from Q1 2026, approaching levels seen during the deep adjustment period from 2013 to 2015, during which the performance of liquor stocks has also been relatively weak. With the micro-structural improvement in the sector, the bank has observed that during the market style rebalancing period in July, liquor and food stocks outperformed the broader market. Valuation still has room for growth, with price increases in high-end liquor catalyzing stock prices. In May and June, liquor experienced considerable fluctuations due to liquidity shocks, with the Shenwan liquor index dropping below the low of "924", and currently, most liquor companies' stock prices are below "924". From a valuation perspective, the current PE TTM of the Shanghai Composite Index and the CSI 300 Index is at the 52% and 65% percentiles, respectively, since 2000, while Shenwan food and beverage valuations are at the 11% percentile, only higher than non-bank financials, with liquor at approximately the 21% percentile. The liquor sector is currently in a low expectation and low valuation state, with opportunities for liquidity, policies, and quantities to act as catalysts. In the short term, the bank sees price increases in high-end liquor reflecting in stock prices. Considering that liquor companies are at varying levels of clearing, the bank expects that those companies that have adjusted early and cleared thoroughly are likely to be the first to welcome valuation recovery, presenting structural opportunities. Risk Warning: Deterioration in prosperity, sudden price drops.