China Consumption: Cheap but Awaiting the Earnings Bottom

Overview

J.P. Morgan's thematic report on China's consumer sector, published on June 18, 2026, notes that the sector is currently cheap but out of favor with the market, and investors need to stay selective while waiting for earnings to bottom out. The core tone of the report is: full-year 2026 consensus earnings forecasts have been sharply cut (staples EPS down 9%, discretionary down 7%), most sub-sectors are near decade lows in valuation, but demand lacks catalysts and earnings downside risks have not yet fully dissipated. Therefore, beta returns are limited, and excess returns (alpha) will mainly come from operator quality rather than sector-wide performance. The report covers multiple sub-sectors—baijiu, beer, ready-to-drink beverages (RTD), restaurant chains (milk tea/coffee), sportswear, home appliances, trendy toys, beauty, jewelry, etc.—and provides clear sub-sector judgments and stock ratings (Overweight/Neutral/Underweight).

Core views

**Overall View: Cheap but Unloved, Waiting for the Earnings Floor.** 2026 consensus earnings forecasts continue to be revised down: staples EPS down 9%, discretionary down 7%, with 80% of covered stocks seeing YTD earnings cuts, led by baijiu and beauty. A few companies with earnings upgrades include Guming, Laopu Gold, Li Ning, and Nongfu Spring. The report believes the "full pricing" of cost pressure may not be reflected until the second half of 2026. **Valuation: Most sub-sectors are at decade lows.** The report's valuation charts show that the overall forward P/E of China's consumer staples and discretionary sectors is approximately 1.5 standard deviations below the 10-year mean. Beverages, beer, seasonings, restaurants, sportswear, beauty, and jewelry are all in the bottom decile of their respective 10-year ranges. **Alpha Source: Operator Quality, Not Beta.** The report emphasizes that demand may still be noisy, but the real story lies in the divergence between leaders and non-leaders. Based on scoring across fundamentals (demand/supply/pricing/margins), returns (dividends), and valuation, sportswear, trendy toys (Pop Toys), and white goods stand out for the next 3-5 years. Among covered stocks, the report favors Anta Sports, Pop Mart, and Midea Group. **Ready-to-Drink Beverages (RTD): Sports Drinks Shine, but Cost Pressure is the Core Theme.** Sports drinks are the fastest-growing category in China's soft drink market, with a 2019-25 CAGR of 14.7%, and an expected 2025-30E CAGR of 10.9%, more than double the overall soft drink growth rate (4%). Eastroc's "Bushui La" has performed exceptionally, with sports drink revenue growing from nearly zero in 2023 to an expected Rmb 8 billion by 2028E, with market share rapidly approaching 20%. Nongfu Spring also launched an electrolyte water new product in 2026, aiming to increase share. Amid intensifying competition, cost pressure is the key theme for the second half: PET bottle-grade prices are currently ~40% above the 2025 average. Sensitivity tests show that for every 10% increase in PET prices, net profits of Nongfu Spring/Eastroc/CR Beverage would be reduced by 3%/8%/21% respectively, with net margins declining by 0.8pp/1.5pp/1.9pp. Nongfu Spring is the most resilient beverage stock (2025 net margin ~30%). **Restaurant Chain/Ready-to-Drink: Divergent Expansion Paths, Blurring Category Boundaries.** 2026-2027 milk tea/coffee chain store expansion shows clear divergence: Luckin and Guming are expected to continue growing by 31% and 51% respectively; while Lucky Cup and Mixue are clearly slowing, reflecting saturation in the low-price segment. Tea brands such as Guming and Mixue are actively adding coffee to their menus to capture incremental demand through existing store networks—the logic being that China's coffee consumption per capita still has enormous room for penetration (only 26% of South Korea's per capita cups). Price competition has eased since 2026, with brands shifting from aggressive discounts to pushing higher-ASP new products. **Beer: Channel Structure Migration, Stable Volume with Price Growth.** China's beer market has entered a stable volume phase, with growth engines clearly shifting toward premiumization and structural migration from on-trade to off-trade channels. The report specifically notes that CR Beer, with 70% off-trade channel exposure, has the greatest structural advantage among the three. Budweiser APAC is undergoing strategic transformation, with 2025 organic sales down 11% and 1Q26 still at -4%. Tsingtao Beer focuses on product mix optimization and its 1-liter large bottle strategy, with April sales growing 2.4%. On the cost side, beer is more resilient than RTD beverages, with YTD beer cost index up only 3.9%. **Baijiu: Approaching the Cycle Bottom, but Recovery Will Be L-Shaped.** Baijiu industry sentiment is affected by the overlap of three cycles—macro (including real estate), supply-demand pricing, and policy—and is currently in the late downturn/early recovery phase. The report compares this to the 2012-2016 cycle, believing the industry has absorbed five quarters of revenue contraction and the policy shock of the anti-extravagance rules. If historical patterns hold, the bottom may arrive in the next 2-3 quarters. But unlike the V-shaped rebound of 2016-17, this recovery is expected to be L-shaped—constrained by structurally slower GDP growth, still-fragile real estate markets outside tier-1 cities, and more cautious consumer sentiment. The core catalyst is Moutai's DTC reform: factory price increases, direct retail price increases, and the operation of the i-Moutai platform are "de-financializing" the wholesale price of Feitian Moutai, with downstream wholesale prices stabilizing above Rmb 1,600. The report views this as a positive signal for the entire sector. **Key Stock Views:** - **Nongfu Spring (OW)**: Strong brand momentum, large gross margin buffer; the least PET-price-sensitive beverage stock. - **Anta Sports (OW)**: Strong multi-brand execution, overseas upside. - **Guming (OW)**: Continued store network expansion, improving brand power, one of the few companies in the report with earnings upgrades. - **Luckin Coffee (OW)**: Solid 1Q26 results, profit recovery on track. - **Pop Mart (N)**: Moat intact but timing is delicate; SOTP valuation at 14x 2026E PE, target price HK$165. Its TAM analysis shows potential store count of 1,000-3,000 (current 630), implying 76% to 4x upside. - **Mixue (UW)**: Needs to be recalibrated for low growth, with network saturation causing significant deceleration in net store openings. - **Wuliangye (UW)**: Market trust needs rebuilding after "accounting error" correction. - **Luzhou Laojiao (UW)**: Mid-price segment shows some resilience but overall sector uncertainty is high. - **Yanghe (UW)**: High inventory, weak recovery. **Catalysts and Strategy:** - Cost inflation from 3Q26 is a negative for the beverage industry; Mid-Autumn Festival and National Day Golden Week are key validation periods for baijiu and gold jewelry. - Allocation: Add to ready-to-drink positions (Guming, Luckin, Chagee) after June; avoid beverage stocks in 3Q26 (especially crowded high-dividend trades). - Comparable bases become more favorable over time: Moutai (Neutral) from 3Q26, ready-to-drink and Pop Mart (Neutral) from 4Q26, beverages from 2Q27.

Analysis framework

The report employs a top-down and bottom-up combined approach. First, it identifies core contradictions at the macro and industry levels (earnings cuts, cost pressures, valuation bottoms, inventory cycles), then applies dedicated analytical frameworks for different sub-sectors: - **Triple-cycle framework for baijiu**: Decomposes baijiu industry sentiment into macro cycle (GDP, real estate, fixed investment), supply-demand pricing cycle (inventory, price, capacity), and policy cycle (anti-extravagance rules, etc.), and historically compares to the 2012-2016 downturn cycle to judge industry position. - **Volume-price decomposition and sensitivity analysis for beverages**: Splits sports drink revenue by volume × price drivers; performs net profit elasticity calculations for PET price increases (impact magnitude for each company per 10% PET price rise), identifying the most resilient stocks. - **Operator quality scorecard**: Constructs a multi-dimensional scoring system covering demand, supply, pricing, margins, dividends, and valuation to identify alpha sources for the next 3-5 years. - **TAM (Total Addressable Market) analysis**: Combines population and GDP benchmarks to estimate Pop Mart's potential store count ceiling and assess current scale growth potential. - **Peer comparison and competitive landscape analysis**: Judges each brand's expansion stage and sustainability by comparing store counts, daily sales per store, ASP, city-tier distribution, and other operational metrics across tea/coffee brands. - **DTC reform event analysis**: Detailed timeline of Moutai's DTC reform key milestones (December 2025 to March 2026), analyzing stock price reactions after each announcement to assess market pricing efficiency and investor expectation changes.

Methodology notes

• Cycle and Sentiment FrameworkInflection Point Analysis

  Triple-cycle framework (macro cycle/supply-demand pricing cycle/policy cycle)

  The report decomposes baijiu industry sentiment into three overlapping yet independent cycles: macro (GDP, real estate, fixed investment) determines underlying demand; the supply-demand pricing cycle reflects inventory and price dynamics; the policy cycle (e.g., anti-extravagance rules)叠加 impacts at specific time points. By separating these three forces, one can understand why the current baijiu downturn is deep but perhaps not far from bottom—because the policy shock landed in 2Q25 and the macro bottom is approaching.

• Company Fundamentals and Financial FrameworkFree cash flow analysis

  EPS/EBIT sensitivity analysis (PET price elasticity test)

  The report constructs a simple 'stress test' table: assuming PET prices rise 10%, it calculates the impact on gross profit, net profit, and net margin for Nongfu, Eastroc, and CR Beverage. This uses the change in one variable (raw material cost) to estimate its top-down transmission effect on the income statement, helping readers instantly judge who has the strongest cost pass-through ability.

• Industry/Industrial Analysis FrameworkPenetration S-curve

  Total Addressable Market (TAM) analysis: Pop Mart store space estimation

  By comparing Pop Mart's store count with blind box/trendy toy penetration in South Korea and other comparable markets (based on population and GDP benchmarks), it estimates China's potential store count at 1,000-3,000, versus the current 630. This is a typical 'penetration space' analysis method—first estimate the ceiling, then compare with the current state, and calculate the growth multiple.

• Competition and Strategy FrameworkMoat / competitive advantage

  Operator Quality rather than Beta

  The report proposes a core view: in a phase where overall industry demand is flat and beta returns are limited, a company's 'operator quality'—brand management capability, supply chain efficiency, new product iteration, channel execution—becomes the main source of excess returns (alpha). It does not rely on the overall industry rising, but on the company doing better than peers.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Beverage industry chain upstream-downstream transmission: cost side → end pricing power

  PET is the main raw material for beverage packaging. When PET prices rise, different companies' cost pass-through abilities vary greatly. The report splits PET's cost structure share for each company (e.g., Nongfu 20% vs CRB 36%) and their respective net margins to calculate who can best absorb the increase and who is most vulnerable. This essentially analyzes the pricing power strength of downstream players (brands) when facing upstream (petrochemical derivatives) price increases.

Asset mapping & comparison

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

• Nongfu Spring (9633.HK)

  One of the report's top picks, benefiting from strong brand momentum and margin buffer

  Strengths

  Tea beverages (41%) and functional drinks (11%) driving growth; smallest PET cost impact (PET only 20% of COGS, net margin 28.4%), net profit only -3% for every 10% PET increase; gross margin ~60%.

  Weaknesses

  2025 revenue growth 23%, but 2026E expected to slow to 13%; core net profit growth expected to drop from 34% to 4%; P/E de-rating.

  Comparison

  Strongest PET resilience among beverage comparables; Eastroc weakest (net profit -8%), CRB most vulnerable (net profit -21%).

  Risks

  ——

• Luckin Coffee (LKNCY.US)

  Overweight, 1Q26 results confirm profit recovery on track

  Strengths

  Continued store expansion (2025-27E +31%), stable daily cups; ASP recovery (+2%); operating margin improving from 10.4% in 2024.

  Weaknesses

  Net store opening growth has slowed from 8,708 in 2025 to an estimated 6,148 in 2026E; competitive landscape uncertainty.

  Comparison

  Higher expansion certainty in the FMD sector; ASP at mid-level (Rmb 13.5), not as high as Manner (Rmb 21) but not as low as Mixue (Rmb 6.4).

  Risks

  ——

• Guming (1364.HK)

  Overweight, alpha opportunity from store expansion and brand improvement

  Strengths

  2025-27E store growth expected at 51%, fastest among all FMD comparables; rapid GMV growth (2025 +46%); operating margin 23% is relatively high in the industry.

  Weaknesses

  Per-cup ASP expected to slightly decline (-2%); sustainability of high growth to be validated.

  Comparison

  More aggressive store expansion than Mixue and Lucky Cup; standout growth in the FMD sector.

  Risks

  ——

• Pop Mart (9992.HK)

  Neutral, moat intact but timing is delicate

  Strengths

  IP commercialization capability validated (Molly/Skullpanda/Dimoo revenue at record highs); strong overseas growth (2025 +292%); TAM shows huge space.

  Weaknesses

  2026E overseas revenue per store expected to fall sharply from 2025 peak; 2026E revenue growth expected to slow to 9% (from 185% in 2025); overseas operating margin to drop from 49% to 31%.

  Comparison

  Wide moat in trendy toys but near-term growth slowdown; SOTP valuation: China business 15x PE, overseas 8x PE.

  Risks

  New super IP launch underperforms; overseas recovery slower than expected; licensing, category expansion delays.

• Mixue (2097.HK)

  Underweight, needs recalibration for low growth

  Strengths

  Absolute scale largest (~60,000 stores), broad consumer base in low-price segment (ASP ~Rmb 6-7).

  Weaknesses

  Store expansion sharply decelerating (2026E only 3,500 net adds vs 13,344 in 2025); Lucky Cup facing net store closures in 2026E (~-200); operating margin declining year by year (from 22.6% to 20.5%).

  Comparison

  Compared to Luckin/Guming, expansion is showing fatigue; saturation in low-end tea market.

  Risks

  ——

• Wuliangye (000858.SZ)

  Underweight, trust to be rebuilt after 'accounting error' correction

  Strengths

  Historically second only to Moutai in brand power; marginal improvement after 2025 'regulated goods' accounting treatment restatement.

  Weaknesses

  Large accounting error (recognizing revenue for goods not yet shipped), net sales/profit significantly restated (2025 net sales from Rmb 51.8bn to Rmb 29.5bn), severe guidance cuts.

  Comparison

  Trust damaged within baijiu sector; compared to Moutai's positive DTC reform progress, Wuliangye faces credibility rebuilding.

  Risks

  ——

• Luzhou Laojiao (000568.SZ)

  Underweight, mid-price resilience but high sector uncertainty

  Strengths

  Mid-range liquor (Tequ) relatively resilient, 2025 revenue -17.5% yoy, outperforming high-end baijiu.

  Weaknesses

  High-end liquor (Guojiao) price segment squeezed, 2025 revenue may fall ~40%; overall revenue continues to decline.

  Comparison

  Relatively defensive among baijiu stocks, but absolute decline still large and sector systemic risk unresolved.

  Risks

  ——

• Yanghe (002304.SZ)

  Underweight, high inventory and weak recovery limit upside

  Strengths

  ——

  Weaknesses

  High channel inventory, weak sell-through; 2025 net sales fell 34.3%, 2026E expected to decline another 16.3%.

  Comparison

  Among the weakest baijiu companies; even compared to Luzhou Laojiao, recovery is slower.

  Risks

  ——

• CR Beer (0291.HK)

  Overweight, largest structural off-trade channel advantage

  Strengths

  70% off-trade channel share (highest among the three); continued positive sales (+1% in 1Q26, accelerating to +2% in April); ongoing premiumization (Heineken series).

  Weaknesses

  Overall beer industry volume is flat, limited growth ceiling.

  Comparison

  Largest beneficiary of channel migration among the three major beer companies, superior to Budweiser APAC (in transformation) and Tsingtao Beer (higher on-trade share).

  Risks

  ——

• Budweiser APAC (1876.HK)

  Neutral, enduring transition pain during channel migration

  Strengths

  Strong premium brand portfolio (Budweiser/Hoegaarden/Corona); structural advantage in East Asia APAC (Korea/India etc.).

  Weaknesses

  Over-reliance on nightlife and premium dining channels, 2025 organic sales -11%, 1Q26 still -4%; strategic adjustment ongoing.

  Comparison

  Less certain beneficiary of channel migration than CR Beer; transformation still needs time.

  Risks

  ——

Key data

• 2026 Earnings Cut Magnitude (Staples/Discretionary)Staples EPS down 9%, Discretionary EPS down 7%80% of covered stocks saw YTD earnings cuts, led by baijiu and beauty
• PET Price Increase (vs 2025 Average)~+40%Most RTD beverage companies have locked in supply and prices until 2Q26, with recent renewals needed
• PET +10% Impact on Net Profit (Nongfu / Eastroc / CR Bev)-3% / -8% (possible typo in original) / -21%CR Beverage most impacted due to highest PET share of COGS (36%) and lowest net margin
• Sports Drinks 2025-30E CAGR vs Overall Soft Drinks CAGR10.9% vs 4.0%Sports drinks growing more than twice as fast as overall soft drinks
• Pop Mart Potential Store Count (TAM Analysis)1,000 - 3,000 storesCurrent 630 (end-2025), implying 76% to 4x upside
• Pop Mart June-27 Target Price (based on 14x 2027E PE)HK$165SOTP valuation: China business at 15x PE, overseas business at 8x PE
• 2025 Baijiu Industry Revenue YoY Change~-18% yoyFive consecutive quarters of contraction
• Moutai DTC Reform Post-Change Feitian Moutai Wholesale PriceStabilized above Rmb 1,600Report believes 'de-financialization' is complete, limited downside
• CR Beer Off-Trade Share70%Highest among the three major beer companies, biggest beneficiary of channel migration
• YTD Beer Cost Index (vs RTD Beverages)Up 3.9%Beer more cost-resilient than RTD beverages

Impact & implications

The report believes China's consumer sector is going through a 'cheap but unloved' phase: valuations have priced in pessimistic expectations, but the earnings inflection point has not yet emerged, and investors need to maintain high selectivity while waiting for the earnings floor. **Implications for the sector:** Beta (sector-wide opportunities) is limited; Alpha will come from a small number of leading companies with strong operator quality. Sportswear, trendy toys, and white goods are the sectors the report believes will have the most structural alpha over the next 3-5 years. **Implications for the cost side:** Cost pressures in the beverage industry (especially PET) will gradually manifest from 3Q26. Companies with low margins and high raw material cost exposure (e.g., CR Beverage) face significant earnings challenges, while those with strong pricing power and high margin barriers (e.g., Nongfu Spring) are safer. **Implications for the baijiu industry:** The industry is approaching the tail end of the downturn cycle, but the rebound will be L-shaped rather than V-shaped. Moutai's DTC reform is a positive signal that can improve pricing transparency and terminal control, but systemic recovery for the entire sector will take time and stronger catalysts. **Implications for the ready-to-drink/tea industry:** Expansion paths have clearly diverged—Luckin and Guming are still opening stores rapidly, but the low-end market (Mixue/Lucky Cup) is showing saturation. Category boundaries are blurring (tea brands selling coffee), which is both an opportunity and a source of intensifying competition. **Implications for investment strategy:** Recommend adding to ready-to-drink stocks after June, avoiding beverage stocks in 3Q26, with Mid-Autumn Festival and National Day as observation windows for baijiu and gold jewelry.

Risks

• Cost pressure (PET) will fully manifest from 3Q26, and beverage companies' earnings may fall short of expectations.
• Baijiu industry recovery is L-shaped not V-shaped; structurally slower GDP growth and still-fragile real estate outside tier-1 cities may drag consumer confidence.
• Although price competition in the restaurant chain/ready-to-drink industry has eased in 2026 YTD, risks of intensifying competition from blurring category boundaries remain.
• Wuliangye's accounting error has shaken market trust in earnings quality, potentially affecting sector valuation framework.
• Pop Mart overseas store operating efficiency decline (revenue per store falling from 2025 peak) may drag overall earnings.
• Mixue (especially Lucky Cup) network saturation; low-end tea market may face a wave of store closures.

What to watch

• Mid-Autumn Festival and National Day Golden Week consumption data: key validation points for baijiu and gold jewelry sectors.
• Actual manifestation of PET cost pressure in beverage companies' earnings from 3Q26.
• Next steps in Moutai's DTC reform: whether factory prices continue to rise, i-Moutai platform sales progress.
• Wuliangye's quarterly earnings after accounting correction (whether normal year-on-year disclosure and earnings recovery path can resume).
• Comparable base effects for ready-to-drink (FMD) leaders: Guming/Luckin/Chagee bases become more favorable from 4Q26.
• China tier-1 city housing price trends: initial stabilization signs have appeared; if stabilization accelerates, it would benefit high-end consumption such as baijiu.
• Summer beer industry volume data—an early and hot summer could be a catalyst.