China Merchants Securities has released a research report indicating that uncertainties in the baijiu sector are gradually dissipating, warranting a cautiously optimistic stance at the bottom while focusing on individual stocks that are emerging from the adjustment phase. Looking ahead to the second half of 2026 through 2027, as inventory digestion progresses and channel pressure eases, prices are expected to bottom out and recover. Combined with a lower base for financial reporting, the probability of narrowing revenue and profit declines, or even returning to growth, is steadily increasing. However, real sell-through has yet to fully recover, and fundamentals remain on the left side of the curve. The sector is therefore not yet positioned for a broad-based recovery, with investment opportunities likely to hinge on the pace of individual stock adjustments.
Stock selection should return to the operational cycle of companies emerging from adjustment, with close attention paid to the resonance of three key indicators: terminal sell-through, channel inventory, and the financial reporting base. Sell-through determines the quality of improvement, inventory determines the slope of recovery, and the base determines the timing of a return to positive earnings. Merely achieving positive growth through a low base without concurrent improvements in sell-through and inventory would represent only a temporary, numbers-driven recovery.
The report's primary views are as follows:
Industry revenue, profit, and cash flow fell by 17%, 21%, and 28% year-on-year respectively in the second quarter of 2026. The deep adjustment has now persisted for four consecutive quarters, indicating the industry is in the mid-to-late stage of its correction, with base pressure easing markedly starting from the third quarter. In the first half of 2026, the baijiu sector's operating revenue, net profit attributable to shareholders, and cash collections stood at RMB 197.91 billion, RMB 73.07 billion, and RMB 200.16 billion, down 6.8%, 8.3%, and 22.5% year-on-year respectively. For the second quarter alone, these figures were RMB 65.27 billion, RMB 21.05 billion, and RMB 75.71 billion, down 17.0%, 21.3%, and 28.0% year-on-year, with revenue and profit declines expanding again from the first quarter, and cash collection declines approaching the worst levels of this cycle.
Excluding Kweichow Moutai, sector revenue in the first half stood at RMB 105.63 billion, down 12.8% year-on-year, and RMB 27.70 billion in the second quarter, down 29.0%, highlighting greater pressure on non-Moutai companies. Shanxi Fenjiu and Luzhou Laojiao proactively intensified their adjustment efforts in the second quarter, signaling that the correction has spread to major distilleries. Looking toward the third and fourth quarters of 2026, industry earnings may still decline year-on-year, but the pace of decline is expected to narrow gradually as inventory control, destocking, and distributor capital pressure are released. Reaching the mid-to-late stage of the industry cycle does not yet confirm a bottom in financial reports; it remains necessary to observe whether cash collections, contract liabilities, and inventory destocking improve in tandem.
By company performance, among high-end liquors, only Kweichow Moutai remained relatively steady, although its second-quarter revenue and profit also turned to declines. Wuliangye’s apparent high growth was primarily due to a low base following an accounting error correction, with a second-quarter net margin of only 12.4%. Luzhou Laojiao saw significantly widened declines in revenue, profit, and cash collections. The sub-premium segment is under pressure across the board, with Shanxi Fenjiu proactively increasing adjustments for its Boshen brand and provincial market, resulting in second-quarter revenue and profit down 17.7% and 43.1% year-on-year. Regional brands are beginning to diverge, with Yingjia Gongjiu and Jinshi Yuan achieving positive revenue and profit growth in the second quarter, while most others, including Gujing Gongjiu, Yanghe, Kouzi Liquor, and Laobaigan, remain in deep adjustment. Currently, only Moutai and a few regional players have stabilized initially, with most distilleries still bottoming out.
Channel deleveraging continues to deepen, with contract liabilities and cash collections weakening in tandem, even as channel health steadily improves. At the end of the second quarter of 2026, sector contract liabilities stood at RMB 32.02 billion, down 13.6% year-on-year and 22.1% quarter-on-quarter, reflecting reduced willingness among distributors to make advance payments and distilleries proactively relaxing payment and task requirements to relieve channel capital strain. Notes receivable and financing receivables reached RMB 15.28 billion, up 19.7% year-on-year but down 53.8% quarter-on-quarter; the annual increase was mainly contributed by Wuliangye, while most companies, including Kweichow Moutai, Luzhou Laojiao, and Shanxi Fenjiu, posted year-on-year declines. A more accurate interpretation is that the industry is gradually reducing financial leverage support to channels. For 2026, most distilleries have not set explicit quantitative growth targets, shifting their operational focus from meeting scale targets to channel health, sell-through improvement, and inventory reduction. This year should be defined as a period of deep industry adjustment and channel clearing.
Distilleries are controlling shipments to boost sell-through, with gross-to-sales spreads and net margins generally under pressure, leading to some distortion in profitability metrics. In the first half, most distilleries saw their gross-to-sales spreads pressured, although second-quarter gross margins improved year-on-year. Companies actively destocking need to increase spending on terminal promotions, channel maintenance, and sell-through initiatives, with related costs recognized in the period without necessarily translating immediately into revenue. In the second quarter, aside from Jinshi Yuan and Yingjia Gongjiu which remained relatively stable, industry profitability was generally under pressure. Wuliangye’s year-on-year net margin improvement was mainly attributable to the low base from retrospective accounting adjustments, with its second-quarter net margin at just 12.4%, an absolute level that remains low.
Risks include economic environment disruptions, weaker-than-expected demand, intensified competition, and channel clearing falling short of expectations.
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