How can baijiu (Chinese liquor) 'accumulate momentum' in the new cycle?

Introduction: The "combo punch" of Fenjiu's product strategy, focusing on Bofen + Qinghua, balances both short-term and long-term development goals.

01 "Squat" and "Jump"

On August 28, Shanxi Fenjiu (600809.SH) $SHANXI FEN WINE(600809.SH) released its 2024 interim report. The report shows that the company achieved revenue of 22.746 billion yuan in the first half of the year, a year-on-year increase of 19.65%, and net profit attributable to shareholders of 8.41 billion yuan, up 24.27% year-on-year.

From 2021 to 2023, Shanxi Fenjiu's revenue grew from 19.971 billion yuan to 31.928 billion yuan, with growth rates of 42.75%, 31.26%, and 21.8%, respectively. Net profit growth rates were 72.56%, 52.36%, and 28.93%, maintaining double-digit growth. Despite the downturn in the baijiu industry, Fenjiu's sustained growth has been outstanding. So why is investor confidence lacking?

In Q1, Fenjiu achieved revenue of 15.338 billion yuan, up 20.94% year-on-year, setting a historical record for a single quarter. Net profit attributable to shareholders was 6.262 billion yuan, up 29.95% year-on-year, continuing the high-growth trend.

In Q2, revenue was 7.41 billion yuan, up 17.1% year-on-year, while net profit attributable to shareholders was 2.15 billion yuan, up 10.2% year-on-year. Comparatively, Q2 performance fell slightly short of market expectations.

This suggests that Q2 performance may be one reason for the stock volatility.

Since the first half of 2024, the macroeconomic recovery has been slow, with weak consumer demand prolonging the baijiu industry's "cooling period."

Data from the China Alcoholic Drinks Association shows that over the past 15 years, the proportion of baijiu in the total beverage market has declined from a peak of 21% to 10.5%. The industry has entered an era of volume contraction and remains in an adjustment phase.

The adjustment phase coincides with the traditional off-season for baijiu sales. Q2, following the Spring Festival, is typically a slow period, and the subdued growth reflects industry realities.

Raising prices and boosting sales during peak seasons while stabilizing prices and ensuring healthy channel development during off-seasons is both an industry norm and a strategic "playbook" for baijiu companies.

Most companies choose to adjust their operational pace in Q2, easing channel inventory pressure and controlling sales expenses to prepare for the upcoming peak season in H2.

02 Adapting to Market Trends

Beyond the seasonal slowdown, some investors question Fenjiu's focus on low-priced products, raising concerns about its future performance.

The data seems to support these concerns. The interim report shows that Fenjiu's gross margins in Q1 and Q2 were 77.46% and 75.09%, respectively, up 1.9% and down 2.7% year-on-year.

From a product profitability perspective, Q1 revenue from mid-to-high-end products was 11.86 billion yuan, up 24.90% year-on-year, significantly higher than the 9.88% growth for other products. Mid-to-high-end products accounted for 77.53% of revenue.

In Q2, the trend reversed. Fenjiu's sales revenue was 7.408 billion yuan, with mid-to-high-end and other products contributing 4.567 billion yuan and 2.797 billion yuan, respectively, growing at 1.49% and 58.29%.

Why did Bofen, the flagship low-end product, outperform in Q2?

Statistics show that the total revenue and net profit growth rates of 20 listed baijiu companies declined in H1. The overall market slowdown and widespread gross margin declines have become industry-wide phenomena.

Consumer market data from the China Alcoholic Drinks Association indicates that the compound annual growth rate of the "plain bottle" baijiu market reached 14% in 2023, with an expected market size exceeding 150 billion yuan in 2024. Despite the economic "new normal," the low-priced baijiu market has shown resilience.

The plain bottle market has stabilized after multiple transformations, with prices concentrated below 100 yuan, particularly in the 50-70 yuan range. Bofen, as one of the few successful low-end products from a major baijiu brand, combines prestige and affordability. In 2023, Bofen became a billion-yuan product, emerging as the third-generation leader in the plain bottle market. Driven by "value-for-money" demand, Bofen's market share has naturally risen.

Strategically, Bofen's growth is no accident. Fenjiu's 2023 annual report explicitly mentioned increasing Bofen production to cultivate the light-aroma market. At the 2023 shareholders' meeting, Fenjiu reiterated plans to expand Bofen, Laobaifen, and Panama series production in 2024.

Fenjiu's product lineup includes the Bofen series (low-end), Laobaifen series (mid-to-low-end), Panama series (mid-range), and Qinghua series (high-end). The Qinghua series extends upward with premium products like Qinghua 30, 40, and 50, while Bofen serves as the foundation for market penetration.

This multi-tiered product portfolio allows for complementary adjustments and targeted strategies.

In Q2, Fenjiu proactively stabilized prices, particularly for Qinghua 20. In March, the ex-factory price of 42-degree and 53-degree Qinghua 20 was raised by 20 yuan per bottle, with corresponding adjustments in channel prices.

For core products, price adjustments and inventory control help maintain brand image, competitiveness, and profitability.

Against the backdrop of strong Spring Festival sales, Fenjiu's price hike for Qinghua 20 boosted market confidence, facilitated inventory reduction, and spurred replenishment.

The sub-premium segment is fiercely competitive among major baijiu brands. Qinghua 20, as Fenjiu's flagship mid-to-high-end product, represents the brand's push into this segment. In 2023, the Qinghua series accounted for 46% of sales, with Qinghua 20 surpassing 10 billion yuan in revenue.

As a strategic product for Fenjiu's "light-aroma revival," Qinghua 20 plays a pivotal role in brand elevation and consumer perception.

03 Leveraging Strengths

The "combo punch" of Bofen and Qinghua 20 balances Fenjiu's short-term and long-term goals.

Fenjiu aims to secure a "one-third share" of the market by 2025, ranking among the top three in revenue and key operational metrics.

As a representative of light-aroma baijiu, expanding this market is critical. Consumer preferences are deeply rooted, making market cultivation a long-term endeavor.

Since 2018, Fenjiu has aggressively expanded beyond its home province. By 2019, out-of-province sales surpassed domestic sales for the first time and have maintained strong growth since.

From 2019 to 2023, out-of-province revenue grew from 5.96 billion yuan to 19.659 billion yuan, increasing its share from 50.74% to 61.57%. This makes Fenjiu a successful case of regional baijiu nationalization.

In H1 2024, domestic sales were 8.394 billion yuan, while out-of-province sales reached 14.266 billion yuan, up 25.65% year-on-year—higher than overall revenue growth—demonstrating significant nationalization progress.

Fenjiu's growth logic combines steady domestic upgrades with out-of-province penetration leveraging brand and aroma advantages.

To sustain this strategy, Fenjiu needs a lever to introduce light-aroma baijiu to new consumers. Bofen is the ideal candidate for three reasons.

First, Bofen's low cost makes it a key tool for attracting new consumers. As a sub-100-yuan product with unmatched value in Shanxi, Bofen is Fenjiu's "secret weapon" for cultivating light-aroma drinkers.

In 2023, Fenjiu's core markets south of the Yangtze River grew over 30%, with multiple regions surpassing 1 billion yuan in sales. The light-aroma category in Guangdong alone is worth about 1 billion yuan, with Fenjiu accounting for over 80%.

Second, Bofen aligns with consumption trends. As a nationally recognized brand, Fenjiu uses Bofen to penetrate new markets—a smart, low-risk strategy.

Amid slow economic recovery, "mass-market baijiu" has become a hotly contested segment. Bofen dominates the 50-yuan plain bottle segment and has become a phenomenon, with annual sales exceeding 1 billion yuan in many provinces by January 2024.

Third, Fenjiu's confidence in Bofen stems from its quality. With a strong reputation and traditional craftsmanship, Bofen has planted the seeds of trust in consumers' minds. Its continued success reflects Fenjiu's forward-looking strategy amid industry consolidation.

In a volatile market, Bofen's steady growth serves as Fenjiu's foundation and a "beacon" for new markets. By cultivating light-aroma drinkers through Bofen and elevating perceptions with Qinghua 20, Fenjiu's "light-aroma dominance" strategy is foolproof.

Post-interim report, multiple institutions gave Shanxi Fenjiu a "buy" rating. Analyst reports highlight Fenjiu's balanced product structure adjustments and four-pronged growth strategy. The company's channel and brand competitiveness, coupled with strong management, underpin its long-term potential.

This year, Fenjiu prioritizes market health and structural stability, emphasizing sustainable, steady growth.

The baijiu industry's development rhythm often contradicts short-term investment logic. "Long-termism" is deeply ingrained, given the lengthy production cycles and aging processes that make baijiu a slow-return business.

Yet this very nature grants baijiu resilience and cyclical stability, shaping China's unique market. How companies navigate downturns is a key indicator of long-term success.

As Records of the Grand Historian states, "The skilled warrior adapts to circumstances." Seasoned investors understand this, avoiding fragmented judgments. Those who sow patiently will reap the richest rewards in the next cycle.