Where to begin

According to a research report from Shenwan Hongyuan, the baijiu industry's financial statements accelerated their decline in Q2 2026, with fundamentals coming under broad pressure. This is primarily attributed to a challenging external demand environment and the release of inventory accumulated over the past few years during 2026. From a stock price perspective, the impact of listed companies' financial reports on share prices has been limited, further validating the bottoming-out signal in share prices.

The firm believes that Moutai's prices have already bottomed out in Q1, marking a cyclical turning point for the industry. The future trend for the sector is volume consolidation, making significant divergence among listed companies inevitable. Despite overall industry contraction, the leading companies that survive in the long term still have growth potential, and high-quality baijiu companies are now entering a strategic accumulation phase. After a full year of adjustment in 2026, if the external demand environment improves in 2027, top-tier companies could experience a "Davis Double Play" in both valuation and earnings.

Key perspectives from Shenwan Hongyuan:

Fundamental analysis: Accelerating decline in Q2 2026 financials, broad fundamental pressure

1. In the first half of 2026, the baijiu industry recorded operating revenue of RMB 191.655 billion, down 6.38% year-on-year, with net profit of RMB 73.131 billion, down 8.14% year-on-year. In absolute revenue changes, the ranking was national famous liquor brands > second-tier high-end brands > mid-tier brands. In absolute profit changes, the ranking was national famous liquor brands > mid-tier brands > second-tier high-end brands. In Q2 2026 alone, the industry's operating revenue was RMB 62.868 billion, a decline of 17.31% year-on-year, while net profit was RMB 21.223 billion, down 21.28%. Both revenue and net profit growth rates followed the order of national famous liquor brands > mid-tier brands > second-tier high-end brands.

2. In the first half of 2026, the baijiu industry's net profit margin stood at 39.13%, down 0.73 percentage points year-on-year. The decline was driven by lower gross margins and higher selling expense ratios. In Q2 2026, the net profit margin was 34.7%, down 1.7 percentage points year-on-year, with the magnitude of change being second-tier high-end brands > mid-tier brands > national famous liquor brands.

3. At the end of Q2 2026, the industry's advance receipts (contract liabilities) totaled RMB 59.673 billion, a sequential decline of RMB 11.297 billion from the end of Q1 2026, compared to a year-on-year increase of RMB 496 million in the same period last year.

4. In Q2 2026, the industry's net operating cash flow was RMB 11.29 billion, down 63.0% year-on-year, while cash received from sales of goods and services was RMB 74.14 billion, down 28.2%, with the decline exceeding the drop in revenue. For the first half of 2026, net operating cash flow was RMB 50.2 billion, down 43.6% year-on-year, and cash received from sales was RMB 196.06 billion, down 22.6%, also exceeding the pace of revenue decline.

Valuation analysis: Below historical median, providing a margin of safety

In Q2 2026, due to the challenging demand environment, the baijiu industry underwent accelerated consolidation, with pressure beginning to surface in financial statements while valuations remained at historical lows. In 2026, as the external demand environment continues to face significant headwinds and companies carry inventory built up over previous years, financial reports are showing an accelerated decline while channel destocking is speeding up. Fundamentals remain under notable pressure but are undergoing an accelerated clearing process.

The firm projects that after a year of adjustment in 2026, some leading brands will fully release pressure from both financials and channels. If the external demand environment improves in 2027, earnings and valuations could see a "Davis Double Play." From a dividend yield perspective, leading brands generally offer yields above 4%, leaving very limited downside for valuations. Should fundamentals stage a reversal in the future, both valuations and earnings could rebound simultaneously.

Risk warnings: Economic downturn impacting overall baijiu demand; food safety issues.