China baijiu destocking is accelerating and inventories are healthier; Goldman Sachs upgrades Gujing and King's Luck to Buy

Overview

This report focuses on the cycle position of China's baijiu industry, demand and inventory repair, TAM revisions, valuation bottoms, and rating changes for key stocks. Goldman Sachs believes the industry remains in the early stage of recovery, but supply contraction, stable wholesale prices, improved channel inventories, and recovering operating cash flow indicate that the worst phase may have passed. The report also emphasizes that business demand and the macro environment remain weak, and a broad demand recovery has yet to become clear, so investment opportunities are more tactical and structural in nature.

Core views

The core view is that the baijiu sector is moving from a destocking downcycle into an early stabilization phase, but earnings performance usually lags within the cycle. Wholesale prices for premium and sub-premium baijiu have stabilized more broadly since January 2026, with improving order and sell-in momentum in 1Q26, and OCF/sales also showing signs of repair. Sector valuations are near historical lows, and dividend yields provide some downside protection; however, long-term TAM has been revised down due to policy, shrinking business banquets, and changes in the consumer base.

Analysis framework

The report combines cyclical review, supply-demand and channel inventory analysis, macro leading indicators, balance sheet and cash flow metrics, valuation percentiles, dividend yields, TAM scenario analysis, and company-level earnings forecasts and target multiple revisions to judge whether the industry is near a bottom and to screen for stocks with improving risk-reward.

Methodology notes

• Cycle position assessmentSupply-demand-wholesale price-inventory-cash flow framework

  Judge the stage of the baijiu cycle through supply contraction, stabilization in wholesale prices, channel inventories, customer advances, and OCF/sales.

  The report believes baijiu companies' P&L often reflects changes in upcycles or downcycles only at the end, so it focuses more on leading or coincident indicators such as wholesale prices, inventories, and cash flow.

• Macro leading indicatorsMacro Dashboard

  Use FAI, housing prices, M2, U.S. Treasury yields, and the capex cycle to explain demand and valuation elasticity.

  Goldman Sachs believes baijiu consumption has historically been correlated with infrastructure, manufacturing, real estate capex cycles, and wealth effects, though this round of correlation may be weaker than in past property-driven cycles.

• Valuation and risk-rewardHistorical P/E percentile and dividend yield framework

  Compare current P/E, P/B, NTM P/E, and dividend yield with the 2013-2015 downturn and recovery periods.

  Current sector valuations are in the low percentiles of the past five and ten years, and some mid- to large-cap baijiu companies have dividend yields above 4%, supporting risk-reward.

• Industry size estimationTAM base case / bear case scenario analysis

  Adjust long-term industry potential by price band, volume, ASP, policy impact, and demographic trends.

  The report cuts industry TAM and expects 2030E industry volume to return to about 75% of 2024 levels; in the bear case, 2026-2028E TAM is 4%-8% below the base case.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China baijiu sector

  A sector tied to industry cyclicality and consumption recovery

  Strengths

  Supply contraction, stabilizing wholesale prices, healthier channel inventories, gradually improving cash flow, and valuations at historically low percentiles.

  Weaknesses

  Demand recovery is not yet broad-based; business and government-related consumption is affected by policy; long-term volume and per-capita consumption remain under pressure.

  Comparison

  The current cycle is compared with the early recovery phase in 2015 following the anti-corruption-driven downturn of 2012-2014, but support from property and capex may be weaker this time.

  Risks

  Prolonged policy impact, macro weakness, slower-than-expected destocking, and weaker-than-expected ASP and volume recovery.

• Moutai

  Sector top pick and ultra-premium leader

  Strengths

  Strong ability to gain market share, more resilient ultra-premium demand, and possible support from stabilizing wholesale prices and improving housing prices.

  Weaknesses

  Valuation is negatively correlated with U.S. Treasury yields, and foreign inflows and interest-rate changes may affect rerating.

  Comparison

  Compared with sub-premium and regional baijiu, the ultra-premium segment has shown stronger recovery in cash flow and customer advances after historical downturns.

  Risks

  Policy pressure on premium consumption, insufficient housing wealth effects, and hawkish U.S. rates putting pressure on valuation.

• Gujing（Gujing Gongjiu）

  Regional leader upgraded to Buy

  Strengths

  High contribution from the local Anhui market, improvement in customer advances and adjusted sales in 1Q26, slowing growth in inventory days, and improving cash conversion.

  Weaknesses

  High exposure to banquet and business consumption, earnings forecasts have been cut, and demand is still waiting for broader bottoming signals.

  Comparison

  Current valuation is significantly below the historical average, with a better risk-reward profile than at the time of the previous sell rating.

  Risks

  Extended policy pressure on Anhui banquet demand, weaker-than-expected national expansion execution, and intensifying competition within Anhui province.

• King's Luck（Jinshiyuan）

  Jiangsu regional baijiu upgraded to Buy

  Strengths

  Proactively destocked earlier, with improving customer advances and cash conversion, while the logic of gaining market share in Jiangsu remains intact.

  Weaknesses

  Inventory days are still high, and earnings recovery requires better demand and continued restoration of channel confidence.

  Comparison

  Relative to Yanghe, the report believes King's Luck has stronger pricing discipline, execution, and brand momentum.

  Risks

  Slower-than-expected demand recovery in Jiangsu, delayed digestion of channel inventories, and competition or new-product performance below expectations.

• Wuliangye、Swellfun、Yanghe

  Names that remain under caution in the report due to destocking pressure

  Strengths

  Some companies may offer high dividends or low-base recovery potential.

  Weaknesses

  Still in the destocking cycle; some trade at 17-25x 2027E P/E, implying relatively high certainty already priced into valuation repair.

  Comparison

  Compared with the improving risk-reward of Gujing and King's Luck, these names face more prominent channel and valuation pressure.

  Risks

  Wholesale price and inventory recovery falling short of expectations, greater distributor support spending needed, and delayed earnings recovery.

Key data

• Sector index performanceCSI liquor index down about 30% since the sector downgrade on July 10, 2025MSCI Consumer Staples fell about 18% over the same period, reflecting concerns over policy, destocking, and a slow demand recovery.
• Sector valuationBaijiu sector at about 17x NTM P/E (excluding Jiugui)Equivalent to about the 6th percentile over the past five years and the 4th percentile over the past ten years.
• Average valuation of covered stocksAbout 19x 2026E P/E and 16x 2027E P/ECovered stocks are down about 27% on average year to date, with valuations close to the early recovery phase in 2015.
• 2025 industry volume-price assumptionsVolume down about 13%, ASP down about 2%Mainly affected by anti-corruption/anti-luxury policies, with more obvious pressure on premium and sub-premium segments.
• 2026E industry forecastRevenue down about 1.4%, volume contracting about 4.4%About 6% recovery in ultra-premium partly offsets continued declines of about 9% in sub-premium and below.
• 2027-2028E industry forecastRevenue recovers by about 0.4% and 2.3%, respectivelyDriven by resilience in ultra-premium and a mild recovery in sub-premium.
• 2030E TAMVolume returns to about 75% of 2024Reflecting the long-term shrinkage in business/government-related consumption occasions and declines in per-capita consumption.
• Dividend yieldMost mid- to large-cap covered baijiu companies have 2026E dividend yields above 4%Wuliangye and Luzhou Laojiao are above 6%, while Gujing, Fen Wine, King's Luck, and Moutai are above 4%.
• Gujing rating and target priceUpgraded to Buy, 12-month target price Rmb105.0Implying 28.5% upside; currently about 13x/12x 2026/27E P/E, with 2026/27E dividend yields of about 5%/6%.
• Fund holdingsActive equity funds' heavy allocation to baijiu fell from 12.4% in 1Q21 to 3.5% in 1Q26Still above the 0.7% low in 1Q15; fund outflows may pressure share prices in the short term.

Impact & implications

The investment implication is that the sector can again be watched from both a defensive perspective and a cyclical bottom-repair perspective, but it is more suitable to select regional leaders whose balance sheets are improving first, valuations already reflect pessimistic expectations, and dividend yields are relatively high. Moutai is still viewed as the most resilient sector top pick; Gujing and King's Luck are upgraded due to improvements in regional demand, cash flow, and inventories. In contrast, names with still-lengthy destocking cycles, relatively rich valuations, or greater channel pressure still warrant caution.

Risks

• The impact of anti-corruption, anti-luxury, and banquet-consumption policies lasts longer than expected.
• Recovery in macro demand, FAI, property, and consumer confidence is weaker than expected.
• Channel inventory digestion is slower than expected, and wholesale prices fall again.
• Improvements in distributor advances, bills, and OCF/sales prove unsustainable.
• Long-term declines in industry population and per-capita consumption lead to further TAM cuts.
• Rising U.S. Treasury yields or foreign outflows pressure valuations.
• Regional competition intensifies, especially in core markets such as Anhui and Jiangsu.
• The magnitude of earnings forecast cuts widens, and target multiples continue to compress.

What to watch

• Whether wholesale prices of Feitian Moutai and core sub-premium SKUs continue to stabilize.
• 2Q26 and 3Q26 sales, net profit, customer advances, inventory days, and OCF/sales.
• Channel inventory and distributor confidence of Gujing and King's Luck in Anhui and Jiangsu.
• Whether FAI, government bond issuance, investment by the six major networks, and AI-related capex accelerate in 2H26.
• Housing prices in tier-1 and key tier-2 cities, as well as regional economic data such as Hefei.
• Changes in M2 growth, U.S. Treasury yields, and active fund holdings in the baijiu sector.
• Dividend payouts of mid- to large-cap baijiu companies in 2026.
• The ongoing impact of anti-corruption/anti-luxury policies on business and government-related consumption occasions.