Huachuang Securities: The liquor market features a coexistence of stock competition, structural optimization, and product diversification, while baijiu recovery and stabilization may still remain the mainstream liquor type in China.

Huachuang Securities released a research report stating that in the short term, the baijiu market is recovering, while in the long term, attention should be paid to leading baijiu brands and pioneering niche categories. Baijiu is expected to remain a mainstream category in China, but it is difficult to reverse the current state of stagnation. Referring to experiences in Japan, the United States, and Western Europe, there are three key areas to focus on: First is the ready-to-drink (RTD) sector, which has shown consistent high certainty growth after the maturity of the industry across these three regions. In China, BaiRun has completed the early educational phase, and a potential catalyst may be the entry of traditional liquor companies, making it worthwhile to monitor leading companies' progress in the RTD space. Second is the trend toward lower alcohol content; categories such as craft beer and flavored liquors have room for penetration among younger consumers and women, so it is essential to choose pioneers with established brand recognition and channel capabilities. Third is the ability to build a category matrix, as evidenced by Japan's Suntory and Asahi, showing that companies that succeed in contracting markets typically operate across multiple categories while single-category businesses often lack resilience against economic cycles. The main viewpoints of Huachuang Securities are as follows: Current Challenges for Chinese Alcoholic Beverages: Significant Adjustments in Price and Volume of Mainstream Categories Looking back over the past decade, the consumption of mainstream alcoholic beverages like baijiu and beer has continued to shrink. In recent years, sales figures have also begun to decline, with both price and volume undergoing significant adjustments. Key influencing factors include strengthened health consciousness, changes in social scenarios, demographic shifts, and adjustments in statistical criteria. Looking ahead, the short-term financial reports for the baijiu industry are still in the process of bottoming out, but gradual recovery is expected in the low baseline of Q3 2026. The mid-term window will focus on the sales and pricing of Maotai during next year's Spring Festival, and in the long term, referencing the experience of mature markets abroad, China's per capita consumption of pure alcohol is projected to gradually decline from a relatively stable 3 liters in 2024 to a range of 2.5-3 liters, with the bottom end of pure alcohol sales estimated at around 200-250 thousand tons. The industry will enter a new phase characterized by competing for existing market shares, structural optimization, and diversification of categories. The shared experiences of Japan, the United States, and Western Europe indicate that diversification is an inevitable trend following the maturation of the alcoholic beverage industry, with the mainstream paths being ready-to-drink products, healthier low-alcohol options, and the penetration of new and emerging alcoholic categories and scenarios. Japan experienced a thirty-year contraction in total alcohol consumption after the bubble economy burst in the 1990s, evolving through multiple category iterations from sake to beer, shochu, liqueurs, and then RTD products in a shrinking market. In the United States, while the overall alcohol consumption per capita remains high, the structure has shifted from beer predominantly to the revival of spirits, the rise of craft beer, and the expansion of RTD products coexisting in multiple categories. Western Europe, too, entered a long cycle of reduction in alcohol content and category replacement earlier, with the growth of RTD products based on spirits confirming that ready-to-drink and lower-alcohol options can replace traditional spirits. From the experiences in Japan, the United States, and Western Europe, the diversification path can be summarized as follows: 1) Ready-to-drink (RTD) products are an inevitable outcome of the maturation of the spirits industry, with economic downturns acting as accelerators; 2) The trend towards lower alcohol content is long-term, encompassing both non-alcoholic and low-alcohol pathways, the latter having a higher ceiling; 3) The penetration of new alcoholic categories relies on systematic strategies, which can be outlined in five steps: choosing the right timing, establishing differentiated positioning, localizing production, transferring capabilities, and surpassing in quality. Looking specifically at China, driven by changes in economic structure, the alcoholic beverage industry may enter a period of diversification. Local advantages held by yellow wine and the global penetration potential of whiskey both show promise for breakouts. The underlying support for domestic diversification in alcoholic beverages is rooted in the economic structural changes since the 2010s. New industries have shifted their focus from government-business relationships to "business strategies and technologies." Influential factors for the post-90s and younger generations have shifted from "relationships" to "KPIs and professional skills," propelling a shift in alcoholic beverages from serving social aspects to focusing on "self-gratification" and "personal branding," leading to a more fragmented and diversified landscape of alcohol categories, with products tending towards ready-to-drink and lower-alcohol offerings. In terms of evolutionary pathways, several local categories currently have smaller market sizes but possess excellent category attributes, while whiskey, as an imported category, is quickly expanding its production capabilities, both demonstrating good growth potential. However, whether this category potential can be realized and successfully commercialized still hinges on corporate strategiesspecifically, the ability to provide unique, personalized products that offer value in self-gratification and personal branding for the new generations. Looking at specific categories: Yellow wine has differentiated advantages in its adaptability for low alcohol content, warm drinking, and pairing with meals, but is limited by regional constraints; whiskey offers diverse flavors but is constrained to niche high-end demographics and nightlife channels; future potential hinges on whether local enterprises can achieve quality surpassing and breakthroughs in daytime channels to broaden consumer demographics; flavored liquor possesses cultural attributes and lower alcohol characteristics; overseas liqueurs and flavored liquors have already confirmed mass-market potential, while domestic categories are still in the cultivation phase with unclear product positioning; ready-to-drink products have been consistently validated as a high-certainty sector in Japan, the U.S., and Western Europe, with BaiRun completing early education, and traditional liquor companies potentially serving as catalysts for this; craft beer is a personalized upgrade of beer, but due to weaker product standardization and channel scale effects, its concentration ceiling is expected to be lower than that of industrial beer. Risk Warning: Ongoing industry demand weakness, significant declines in baijiu prices, diversification layouts falling short of expectations, among others.