CITIC SEC: Baijiu in the late stage of bottoming; beer expectations revised downward

CITIC SEC released a research report stating that the baijiu sector is currently in the late stage of cyclical bottoming and the tail end of clearing, with bottoming signals such as price, inventory, and expectations already evident. Looking ahead to 2027, the firm judges that supply and demand in the baijiu industry are expected to achieve a new equilibriumdemand is expected to see a weak recovery under macro catalysts and a low base, while supply is expected to contract further but with intensifying competition. In the long term, the industry is expected to steadily enter a benign repair phase. Although there is still some pressure on the domestic demand side at present, current valuations have already reflected considerable pessimistic expectations for the industry's medium- to long-term development. Considering that the baijiu sector already possesses strong dividend value and the potential expectation gap from a future shift in demand expectations, the firm recommends increasing allocation to leading liquor companies at the industry bottom. CITIC SEC's main views are as follows: Baijiu is in the late stage of cyclical bottoming and the tail end of clearing From the beginning of 2026 to date (2026/10/20), the baijiu index (CITIC) fell 12.3%, underperforming the CSI 300 Index by 2.0pcts and the Wind All A Index by 3.0pcts. Anhui Yingjiagongjiu (+5.8%) was the only baijiu company to record a positive return. The baijiu sector suffered a deep mispricing in the first half of the year and significantly underperformed, then recovered somewhat in the third quarter due to liquidity effects. This round of adjustment in the baijiu industry, counted from the peak of prosperity in 2021, has lasted more than five years, during which the industry successively went through four stages: weakening demand, declining wholesale prices, channel inventory buildup, and financial statement clearing. From 2026 to date, the baijiu industry has also completed the vast majority of clearing across multiple dimensions including price, inventory, channels, and performance. It is currently in the late stage of bottoming and the tail end of clearing, with bottoming signals such as premium liquor wholesale prices, channel inventory, and market expectations already evident. 2027 Outlook: Supply and demand expected to achieve a "new equilibrium" Industry demand is expected to achieve a weak recovery under macro catalysts and a low base: 1) At the macro level, a recovery in the production side opens a channel for business recovery, and a policy shift constitutes the largest option; 2) At the industry level, the demand decline is narrowing quarter by quarter, and the supply-demand mismatch is being digested; 3) At the low-base effect level, the financial statement base after consecutive years of clearing has fallen to the lowest level in recent years. Industry supply is expected to contract further but competition will intensify: 1) Leading liquor companies are proactively cutting shipments: shifting from pursuing scale to healthy growth, shipment volumes are expected to remain restrained in 2027; 2) Share is accelerating toward the top: industry competition in 2027 will be even more intense. Dividend base position first, repair option later The baijiu sector currently possesses strong dividend value. As of now (10/20), the dividend yield (TTM) of the baijiu sector is 4.6%, with a spread of +2.97 percentage points over the 10-year government bond yield, at the highest historical range. Leading liquor companies are continuously enhancing shareholder returns, which is expected to gradually improve the investment margin of safety for the baijiu sector. From a relative valuation perspective, the P/E ratio (TTM) of the CITIC Baijiu Index is 20.1x, having fallen back to the medium- to long-term bottom range. Current valuations have already reflected considerable pessimistic expectations for the industry's medium- to long-term development, gradually pricing in the most conservative assumptions of long-term demand shrinkage and a downward shift in liquor companies' performance midpoints. However, if domestic demand shows a recovery trend in the future, baijiu, as a consumer asset with prominent pro-cyclical attributes, would see demand elasticity far exceeding the assumption of essentially no growth implied by current valuations. The sector is expected to have a large expectation gap and room for repair. Beer is experiencing sales volume and cost pressure; expectations should be appropriately lowered The 2026 peak season for beer has passed. In the first quarter, the beer industry maintained a good start, supported by the timing shift of the Spring Festival and a temporary stabilization in catering; in the second quarter, affected by the macroeconomy, overall performance was relatively weak, with monthly year-on-year growth turning from positive to negative; in the third quarter, under the impact of more rainfall, the decline further widened to mid-to-high single digits. The firm expects full-year industry sales volume to decline somewhat, with tonnage prices overall stable with slight increases driven by leading companies' premiumization strategies. On the profit side, affected by the decline in production scale, companies are expected to face slight pressure on profits. Looking ahead to 2027, the firm judges that the industry will remain in a stage of "stable volume, stable prices, and earnings under pressure," and recommends appropriately lowering expectations for the sector, while noting the pressure from rising raw material costs such as aluminum and barley. For industry excess returns, attention is recommended on two aspects: first, regional leaders with internal management efficiency improvements, big single-product drivers, and tonnage price increases; second, high-market-share leading companies with sufficient cost locking, strict expense discipline, and a low profit base. Risk factors: Macro consumer demand falling short of expectations; intensifying competition in the baijiu and beer industries; market performance of core baijiu products' prices falling short of expectations; risk of high channel inventory; catering consumption recovery falling short of expectations; food safety issues, etc. Investment strategy: The baijiu sector is currently in the late stage of cyclical bottoming and the tail end of clearing, with bottoming signals such as price, inventory, and expectations already evident. Looking ahead to 2027, the firm judges that supply and demand in the baijiu industry are expected to achieve a new equilibriumdemand is expected to see a weak recovery under macro catalysts and a low base, while supply is expected to contract further but with intensifying competition. In the long term, the industry is expected to steadily enter a benign repair phase. Although there is still some pressure on the domestic demand side at present, current valuations have already reflected considerable pessimistic expectations for the industry's medium- to long-term development. Considering that the baijiu sector already possesses strong dividend value and the potential expectation gap from a future shift in demand expectations, the firm recommends increasing allocation to leading liquor companies at the industry bottom. For beer excess returns, focus mainly on regional leaders with potential for market share gains and high-market-share leaders. For new alcoholic beverages, pay attention to market style and companies' new product distribution.