Since 2021, the liquor industry has underperformed the market for four consecutive years, with institutional holdings and attention declining, leading to a divergence in market views on the investment value in the short and long term.
On January 1st, GF SECURITIES analysts Fu Rong and Gao Hong published a research report discussing three major divergences among investors regarding the investment value of the liquor industry:
<blockquote>
(1) In the long term, some investors believe the liquor industry is a &#34;sunset industry.&#34;
(2) In the short term, some investors are concerned about the inventory cycle in the liquor industry, with destocking leading to a significant decline in apparent performance.
(3) From a trading perspective, some investors are also worried about high liquor holdings and crowded trading.
</blockquote>
Guangdong Securities believes that from a fundamental perspective, after nearly four years of adjustment, the liquor industry is expected to rebound with the support of policies and an improving economy. It will take time to shift from absolute returns to relative returns, but the recovery of demand after industry clearing is promising.
<h2>How to view the growth space of leading liquor companies?</h2>
The report states that, firstly, the liquor industry has stable revenue growth, and the market share of leading companies has significantly increased. From 2015 to 2023, the market share of listed liquor companies (excluding those with a market value below 10 billion) increased from 20% to 54%, while the market share of the top five listed companies rose from 16% to 44%.
Secondly, the agglomeration effect of leading companies is evident, and there is significant room for future market share growth. From 2015 to 2023, the revenue of the top five listed liquor companies grew by 275%, and their market share growth rate is faster compared to the overall listed companies. Compared to other consumer industries in China, the CR5 ratio of the liquor industry is 44%, which is still relatively low.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/56c27916-0423-40e4-b542-665f7bf19b58.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/56c27916-0423-40e4-b542-665f7bf19b58.png"/>
<h2>How to view the &#34;bubble&#34; in the financial statements of leading liquor companies?</h2>
GF SECURITIES found that the ROE of the liquor industry has a strong correlation with stock price trends, but there has been a divergence over the past two years—the industry's ROE continues to improve, but stock prices have weakened—reflecting market concerns about the inventory and performance sustainability of the liquor industry.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/66fb43e7-0a14-43b5-9347-d593c35c844f.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/66fb43e7-0a14-43b5-9347-d593c35c844f.png"/>
How to view this &#34;bubble&#34; in the financial statements of leading liquor companies? The report believes that from a ten-year perspective, the prepayments in the liquor industry are still growing. Taking Kweichow Moutai as an example, prepayments have decreased since 2021, but if we extend the time frame, its prepayments were only 19.5 billion yuan in 2015, rising to 54.7 billion yuan by 2023, indicating that the industry has not experienced a situation where early payments for shipments were made due to growth pressure.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e39f2236-f945-4c5e-8944-a70fd9ec9b82.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/e39f2236-f945-4c5e-8944-a70fd9ec9b82.png"/>
Secondly, as an industry leader, Kweichow Moutai's financial statements still &#34;have room to spare,&#34; and the factory price difference of Moutai liquor provides a certain safety cushion for the company's financial growth.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/9983de9a-efcf-41f3-9f65-ce365b224252.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/9983de9a-efcf-41f3-9f65-ce365b224252.png"/>
The report states that although the current market is facing phase adjustment pressure, the long-term leader aggregation effect is obvious and the structure is expected to continue to upgrade and optimize. With the implementation of a series of incremental policies by the state, the economic environment is expected to gradually improve, leading to a reversal of expectations and subsequently driving the sector's recovery.
<h2>How to view the overweight position of liquor funds?</h2>
The report indicates that this round of reduction is mainly due to valuation digestion, and the active equity holdings are close to the cyclical bottom of 2018, with the &#34;grouping&#34; concentrated in leading companies, and most active equity funds are currently underweight.
In terms of the heavy holding ratio of liquor, the heavy holding ratio of liquor in the entire market fund for Q3 2024 is 10.3%, higher than 1.4%/6.8% in Q4 2013/Q4 2018, and the overweight ratio is also overall higher than the previous two cyclical bottoms.
Excluding the impact of passive index funds, the heavy holding ratio of liquor in active equity funds (equity mixed + ordinary stocks + flexible allocation funds) is 7.0%, close to the level of Q4 2018 (6.0%).
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/07833193-fc71-4864-8aea-b747cd988aae.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/07833193-fc71-4864-8aea-b747cd988aae.png"/>
Moreover, compared to the 2012-2014 cycle, excluding the top ten holding funds, the overweight ratios for the 2013 annual report and the 2024 interim report for the entire market are 0.3% and -0.2%, respectively, indicating that liquor is currently in an underweight state.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/d730dc0a-1f72-4d28-be74-583bbdaa269e.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/d730dc0a-1f72-4d28-be74-583bbdaa269e.png"/>
Therefore, the report believes that the relatively high holding of liquor in this cycle is more due to the stable holdings of leading funds, and it is expected that subsequent trading will not be overly crowded.
The main viewpoints of this article come from the report &#34;A Brief Discussion on the Capital Market's Divergence on the Liquor Industry&#34; published by GF SECURITIES's Fu Rong (SAC License No.: S0260523120002) and Gao Hong (SAC License No.: S0260522010001) on January 1, 2025

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The three major divergences are: the liquor industry is a sunset industry, industry destocking will lead to performance decline, and high positions lead to crowded trading. GF SECURITIES believes that: the liquor industry has stable revenue growth, and the leading aggregation effect is obvious, with significant room for future market share; in the long term, prepayments in the liquor industry still have growth; liquor positions are largely contributed by leading funds, and most active equity funds are currently underweight

- Since 2021, the liquor industry has underperformed, leading to declining institutional interest and differing views on its investment value.  
- A report from GF Securities discusses concerns about the liquor sector being viewed as a "sunset industry," worries over inventory cycles, and high trading congestion, while highlighting the growth potential of leading companies.  
- Despite current market pressures, the report suggests that the industry's fundamentals are improving, with leading firms gaining market share and the potential for recovery as economic conditions stabilize.

Wallstreetcn

Yanghe

GF SECURITIES

GF SEC

JGJC

Moutai

SHUNXIN AGRICULTURE

ZJLD

BANK OF E ASIA

After four consecutive years of underperformance, how to view the three major divergences in the liquor industry?