Guotai Junan Securities released a research report stating that in July, market trading exhibited a rotation from high to low valuations. Liquidity in traditional sectors, particularly baijiu, significantly rebounded. This was further supported by increased holdings from China Reform Holdings, China Chengtong Group, and multiple local state-owned investment platforms, leading to a valuation recovery. As the market rebalances, the value proposition at the bottom of the food and beverage sector becomes evident. The report suggests that consumer staples will be the main theme throughout the year, recommending investors seize low-position opportunities now. It anticipates that baijiu fundamentals will accelerate their bottoming-out process, and stocks set to clear first are worth recommending.
The market's style rotation in July drove a valuation recovery for baijiu. Liquidity in traditional sectors improved, boosted by the aforementioned state-owned capital purchases. Based on performance forecasts and shareholder meeting surveys from several baijiu companies, the report expects the industry's financial statements to continue clearing in the second quarter of 2026, with only a few individual stocks possibly achieving year-on-year stability or growth. Considering that the sector's micro-trading structure has already improved significantly, with the allocation ratio for key baijiu stocks in the second quarter of 2026 falling 1.93 percentage points quarter-on-quarter to 0.97%, and given that dividend yields and valuations are now somewhat attractive, the combination of accelerating fundamental bottoming and trading shocks suggests positioning for stocks that will clear first.
The recovery trend for consumer staples is clear, and the inflexion point for raw milk prices is becoming apparent. After short-term declines in high-frequency consumption data in April and May, the consumer staples sector began to stabilize marginally in June, with a further moderate improvement expected in the third quarter. The full-year recovery trend is now confirmed. The penetration of healthy foods is increasing, and growth is sustained. The catering supply chain/condiments sector benefits from improving supply and demand, with leading companies expected to maintain steady growth even in the typically slow season of the second quarter; this remains a key theme for the year. Some leading beverage and beer companies are outperforming the overall industry. After expectations have fallen, their valuations offer attractive value. For example, Eastroc Beverage Co., Ltd. reported second-quarter 2026 revenue up 11.3% year-on-year, net profit attributable to shareholders up 15.4%, and core net profit up 6.56%. The company proposed a cash dividend payout ratio of 76% and announced a plan for no less than 80% annual dividends from 2026-2028, along with a Hong Kong share buyback scheme, highlighting its value. The cycle for raw milk is showing a clear inflection point, driving improvements in leaders of the dairy and pastoral sectors. Yuanrun Dairy issued a positive profit forecast, expecting a net profit attributable to shareholders of 739-903 million yuan for the first half of 2026, compared to a net loss of 297 million yuan in the first half of 2025, indicating a turnaround to profit. The synergy between meat and milk is generating strong profit elasticity. The allocation ratio for food and beverage heavyweight stocks in the second quarter of 2026 fell 2.41 percentage points quarter-on-quarter to 1.49%. Within this, the consumer staples sector's allocation ratio dropped 0.48 percentage points quarter-on-quarter to 0.52%, indicating a relatively clear clearing at the trading level. Supported by the fundamentals' recovery trend, the prospects for a bottom-up rebound in growth and oversold consumer staples stocks are highly certain.
Comments