Soft drink consumption season has concluded, with leading companies reporting stable Q3 results and further strengthening their competitive advantages. The soft drink industry demonstrates resilient demand fundamentals despite environmental fluctuations. Zhongtai Securities recommends prioritizing structural growth segments within beverages, particularly functional drinks and sugar-free tea leaders. On the profit front, cost advantages from raw materials and packaging materials are expected to persist, warranting continued attention to corporate competition strategies and new product developments.
Key investment themes: 1. Prioritize high-growth segments and industry leaders to capture both market expansion and market share gains. 2. Continued cost benefits from raw materials and packaging materials, coupled with stable earnings and high dividend yields.
**2025 Industry Review** - Performance: As of November 28, 2025, the Shenwan Soft Drink Index rose 7.6% YTD, underperforming the SSE Index by 8.4% but outperforming the Food & Beverage Index by 12.4%. Sector valuations retreated in Q3, with a current PE-TTM (ex-negative) of 28.3x, at the 46th percentile of 3-year range. - Market Dynamics: Volume-driven sales growth showed category divergence. Nielsen data indicates China's soft drink sales maintained mid-to-high single-digit growth, primarily volume-driven with flat pricing. MAT2503 sales, volume, and ASP grew 7.4%, 7.2%, and 0.2% YoY respectively. H1 2025 saw positive sales growth across all channels, though momentum turned negative from July due to disruptions from food delivery competition and emerging retail formats (e.g., membership stores). Category-wise, sports drinks delivered three consecutive quarters of strong growth, while plant-based drinks saw double-digit H1 sales growth with mild price pressure.
**2026 Outlook: Structural Growth Driven by Health & Functionality** - Macro Cycle: Soft drink demand remains resilient despite macroeconomic headwinds. October 2025 CPI turned positive while PPI declines narrowed, though sustained recovery requires further confirmation. Post-pandemic, soft drinks outperformed broader FMCG in demand recovery, with 2023-2024 sales growth of 6.6% and 8.7% versus FMCG's -0.5% and 2.8%. Key drivers include: 1) Innovative categories like sugar-free tea and functional beverages addressing "hydration + nutrition + functionality + emotional" needs. 2) Ongoing penetration of lower-tier markets, with foodservice channels still underpenetrated. - Category Trends: Health-focused, functional products and value-oriented large packaging will dominate. Two core consumer groups (Gen Z and millennials, with >90% penetration) prioritize health, functionality, and emotional benefits, while income pressures amplify demand for cost-effective options.
- Cost Cycle: Favorable sugar and PET prices may persist in 2026, though marginal benefits could diminish. Corrugated paper prices face upward pressure.
- Competitive Landscape: Market consolidation continues, with leaders (8.6% revenue CAGR 2019-2024 vs. niche players' -0.7%) extending advantages through: 1) Share gains in high-growth segments (functional drinks, sugar-free tea) and packaging water market recalibration. 2) Platform strategies: Dongpeng leverages value pricing and rural channels, while Nongfu Spring's "natural & healthy" branding supports its multi-category expansion.
**Risks**: Macro volatility, intensifying competition, weaker-than-expected demand, delayed channel reforms, and new product setbacks.
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