China Baijiu Sector：Will destocking of Moutai 'social inventory' lead to a further sector derating？

Investment Rating - The report downgrades Moutai, Wuliangye, Laojiao, and Yanghe from Buy to Neutral, while reiterating Sell on Swellfun and Fenjiu due to their demanding valuations. Gujing is rated as the top pick with a Buy rating [4][7][39]. Core Viewpoints - The supply/demand dynamics for the baijiu sector are expected to deteriorate over the next 12 months due to potential destocking of Moutai's social inventory, capacity expansion by industry leaders, and ongoing macroeconomic challenges. The average EPS CAGR for the baijiu sector is projected to moderate to 8% from 19% during 2020-23 [1][4][39]. - The combined capacity of the top six baijiu companies is anticipated to expand by 37% from 2023 levels, while the primary drinking demographic (males aged 30-59) is expected to decline, leading to a potential 13% volume decline in baijiu consumption during 2023-25E [3][39][40]. Summary by Sections Earnings and Valuation - The report projects 2024E/25E earnings to be 8% and 17% below consensus on average. The baijiu sector is currently trading at 17x 12-month forward PE, compared to a historical average of 22x and a trough of 10x since 2010 [1][15][41]. Supply and Demand Dynamics - Moutai's wholesale prices are under pressure due to accumulated social inventory, estimated at 14-15 months' worth of sales, with an average holding cost of Rmb2,079 per bottle, approximately 10% below current prices. If supply is not contained, Moutai and Wuliangye's wholesale prices could fall by 50% and 17% respectively by the end of 2025 [2][30][33]. Demographic Trends - The primary baijiu consumer cohort is experiencing a population decline, which is expected to negatively impact sector volume growth. The report estimates a potential 13% decline in total baijiu consumption volume from 2023 to 2025 [3][39][40]. Company-Specific Insights - Gujing is highlighted as the most preferred stock due to its margin expansion opportunities, while Swellfun and Fenjiu are rated as Sell due to their high valuations [4][39].