25 August 2025 | 3:47PM HKT China Spirits Tracker: Market sentiment recovering from low, demand still improving gradually; Moutai/Wuliangye wholesale price weakens We have recently observed market sentiment rotation to laggards as investors take a "worst is over" stance on the spirits space (ie. sequential normalization of anti-graft policy impact), with the spirits P/E gap vs. A-share P/E approaching a decade low at c.2-3x (18% premium vs. last decade average at 103%, see Exhibit 1) and Northbound fund flo ...

Investment Rating - The report does not explicitly state an investment rating for the spirits industry or specific companies within it Core Insights - The spirits industry is currently experiencing a transition period, with companies focusing on stability, channel profits, and product quality rather than aggressive growth targets [3] - There is a noted weak trend in consumption around the Dragon Boat Festival, with only Moutai showing a slight increase in prepayment compared to the previous year [1][6] - Companies are increasingly targeting younger consumers and expanding their brand rejuvenation efforts to capture this demographic [3] Summary by Company Moutai - Moutai has introduced new promotional policies for residential and wedding banquets to stimulate demand, including cash rebates and complimentary honeymoon trips for larger events [13] - The wholesale price of original case Feitian Moutai decreased from Rmb2,165 to Rmb2,125, while unpacked Feitian Moutai's price fell from Rmb2,080 to Rmb2,060 [2][22] Wuliangye - Wuliangye's wholesale price remained stable at Rmb950, with prepayment rates in the first quarter of 2025 reported at 40%-50% [6][22] Guojiao 1573 - Guojiao 1573's wholesale price decreased from Rmb860 to Rmb855, with prepayment rates around 40%-45% [6][22] Yanghe - Yanghe reported a prepayment rate of approximately 45% and is focusing on expanding its sales network [6][8] Gujing - Gujing aims for nationwide expansion and a focus on sub-premium strategies, with a sales network covering over 70% of regions nationwide [7][8] Yingjia - Yingjia targets total sales of Rmb7.6 billion for 2025, reflecting a 3.5% year-on-year increase, and plans to improve dividend payout ratios [11][13] Market Trends - The retail sales of liquor and tobacco in China grew by 5.1% year-on-year in April 2025, indicating a gradual recovery in the market [13] - Spirits companies are focusing on improving retail sell-through, inventory destocking, and channel expansion amid industry-wide growth deceleration [13]

Summary of Conference Call Notes Industry Overview - **Industry**: Consumer Staples - **Companies Discussed**: Kweichow Moutai (Moutai) and Wuliangye Yibin (WLY) Key Points on Kweichow Moutai (Moutai) 1. **Channel Adjustments**: Moutai's recent strategy to focus on large distributors has stabilized the price of Feitian, positively impacting Moutai's share price [1][2] 2. **Management Goals**: Moutai's management aims to stabilize Feitian prices by 2025, with recent visits to 15 provinces to engage with distributors [2] 3. **Earnings Forecasts**: Moutai's earnings forecasts for 2025/26 have been trimmed by 5% and 9% respectively, but are still 3-5% higher than consensus estimates [4] 4. **Cost Management**: The company is expected to maintain superior cost and operational expense management as distributors regain control over direct-to-consumer (DTC) sales [4] 5. **Price Stability Confidence**: There is increased confidence that Moutai will stabilize or potentially raise Feitian prices moving forward [4] Key Points on Wuliangye Yibin (WLY) 1. **E-commerce Impact**: WLY is facing significant disruptions from e-commerce, with smaller distributors reselling inventory online due to dissatisfaction with price hikes and low rebates [3] 2. **Free Cash Flow (FCF) Concerns**: WLY's estimated FCF for 2024 is projected at RMB30 billion, a 20% decrease year-over-year, raising concerns about its recovery capabilities [5] 3. **Distributor Health**: There are strong concerns regarding WLY's distributor margins and overall health, which may necessitate supply cuts or special rebates to stabilize pricing [5] 4. **Brand Equity Risks**: WLY's brand equity is at risk due to unauthorized reselling activities, which could further complicate pricing strategies [5] 5. **Earnings Forecasts**: WLY's earnings forecasts have been cut, with a new price target set at RMB100, which is 6-12% lower than consensus estimates [5] Additional Insights - **Market Divergence**: The report anticipates a widening performance gap between Moutai and WLY, with Moutai expected to outperform WLY in the near future [1] - **Management Engagement**: Moutai's proactive engagement with distributors is seen as a positive step towards stabilizing market sentiment and pricing [2] - **Model Updates**: The report includes updated models reflecting the latest results for both companies, indicating a cautious outlook for WLY compared to Moutai [4][5]