China Merchants Securities has released a research report stating that the single-quarter revenue decline of -30% year-on-year in Q4 2025 marked the deepest point of the current adjustment cycle. In Q1 2026, the declines in both revenue and profits narrowed, indicating the industry has passed its most challenging period. Channel contraction and inventory clearance are ongoing. While contract liabilities remained generally weak in Q1 2026, a rebound in notes receivable reflects distilleries' proactive efforts to ease channel pressure and reduce financial strain on distributors. In terms of fund holdings, the weighting of the baijiu sector continued to decrease, although positions in Kweichow Moutai and Wuliangye began to increase. The bottom for the sector has been established, and constraints are gradually fading. Investors should focus on companies that are navigating the inflection point.
The main views of China Merchants Securities are as follows: The single-quarter revenue decline of -30% YoY in Q4 2025 was the deepest of this adjustment cycle. The narrowing of revenue and profit declines in Q1 2026 signals the industry is emerging from its darkest hours. In 2025, the baijiu industry's revenue/net profit attributable to shareholders/cash collection were 361.85 billion yuan/126.37 billion yuan/428.71 billion yuan, representing year-on-year changes of -18.2%/-24.2%/-10.3%, respectively. In Q4 2025 alone, revenue/net profit/cash collection were 71.93 billion yuan/18.83 billion yuan/86.61 billion yuan, down 29.6%/46.1%/29.1% YoY. The revenue decline exceeded that of any single quarter during the 2012-2015 adjustment cycle. Kweichow Moutai's Q4 net profit saw its first-ever decline (-30.3%), while Wuliangye's full-year revenue fell 54.6% YoY. In Q1 2026, industry revenue/net profit/cash collection were 132.63 billion yuan/52.02 billion yuan/124.45 billion yuan, changing by -0.7%/-1.8%/-18.6% YoY. The declines in revenue and profit narrowed to near-flat levels. Excluding Wuliangye, single Q1 revenue/profit declined by 5.7%/9.4%. Kweichow Moutai was the first to return to growth in Q1 2026 (+6.3%). Following the extreme difficulties of Q4 2025, the sector's financial reports hit their lowest point in Q1 2026 and are expected to show sequential improvement quarter-by-quarter.
By company performance: Among premium baijiu, Kweichow Moutai, leveraging its brand strength and i-Moutai channel reforms, reported a slight full-year decline of 1% and was the first to resume growth in Q1 2026, with reform dividends gradually being realized. Wuliangye significantly reduced historical burdens based on the prudence principle, undertaking the most substantial inventory clearance in the industry, with healthy sell-through feedback in Q1 2026. Luzhou Laojiao underwent deep clearance in Q4, nearly wiping out profits, and while the decline narrowed in Q1 2026, it remains in an adjustment phase, supported by a high dividend yield at the bottom. Among sub-premium brands, Shanxi Xinghuacun Fen Wine achieved the only positive full-year growth, driven by volume growth of its 'Bo Fen' product and expansion outside its home province. It began clearance as expected in Q1 2026 but maintained high-quality collections and ample channel reserves. Sichuan Swellfun saw a narrower decline and healthier inventory levels. Shede Spirits returned to positive growth within its home province, and Jiugui Liquor's 'Free Love' product performed notably well. Among regional baijiu, Yingjia Liquor and Lao Bai Gan were the first to report positive year-on-year growth in Q1 2026. Anhui Gujing Distillery has passed its most difficult period. Jiangsu King's Luck Brewery demonstrated strong resilience with its 'Danya' series and significantly increased its channel reserves. Yanghe Brewery and Anhui Kouzi Liquor are still in their adjustment phases, while Gansu Jinjiu Liquor highlighted operational resilience.
Channel contraction and clearance continue. Contract liabilities remained generally weak in Q1 2026, but the rise in notes receivable indicates distilleries are proactively alleviating pressure on the channel and easing dealer financial strain. Sector-wide contract liabilities stood at 41.08 billion yuan at the end of Q1 2026 (down 6.2% YoY). Reserves increased significantly for Wuliangye, Shanxi Xinghuacun Fen Wine, and Jiangsu King's Luck Brewery, showing enhanced channel binding capability for leading firms. In 2025, distillers adopted a pragmatic and prudent approach, with most failing to meet annual targets. For 2026, most have essentially abandoned specific numerical growth targets, prioritizing market health over scale expansion. During the adjustment phase, gross margins faced slight pressure, primarily due to product mix dilution. Rigid costs combined with revenue decline led to a significant increase in the expense ratio. Concentrated expense recognition in Q4 2025 caused a temporary distortion in profitability metrics, which returned to normal levels in Q1 2026 due to seasonal peak effects.
Holdings Analysis: The baijiu sector's weighting in fund portfolios continued to decline, while positions in Moutai and Wuliangye began to increase. The heavy allocation weighting to the baijiu sector fell by 0.1 percentage points quarter-on-quarter to 3.4% in Q1 2026. From its peak, this weighting has retreated by 11 percentage points, an adjustment greater than that seen in 2018. Active fund ownership increased for Kweichow Moutai and Wuliangye, while positions in Shanxi Xinghuacun Fen Wine, Luzhou Laojiao, and Anhui Gujing Distillery continued to be reduced. When active funds added to the sector, they predominantly chose Kweichow Moutai.
Investment Recommendation: The bottom has been identified, and constraints are gradually receding. Focus on companies emerging from the inflection point. The report strongly recommends: Kweichow Moutai for its ability to navigate cycles, Shanxi Xinghuacun Fen Wine for gaining market share against the trend, and Yingjia Liquor for being among the first to emerge from adjustment. It also recommends Luzhou Laojiao for its management restraint and Anhui Gujing Distillery for its strengthened competitive position in its home province. Investors are advised to monitor Lao Bai Gan and Jiangsu King's Luck Brewery, which are still gaining regional market share. Risks include economic environment fluctuations, demand falling short of expectations, intensified competition, and slower-than-expected channel clearance.
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