Company Reports

Chinese baijiu sales have deteriorated since the second half of 2024, and the sector has lagged the broader market. An aging population and falling per capita drinking rates point to a shrinking pool of buyers, prompting us to reassess competitive strength across our coverage.

Second-quarter profits fell across China's subpremium baijiu makers amid continued industry headwinds. Shanxi Fen Wine reported a 43% year-on-year decline in net profit, Yanghe's core operating profit slipped to breakeven, and Swellfun widened its losses.

Sichuan Swellfun, or Swellfun, is one of the key subpremium baijiu brands in China with aged cellars dating as far back as the late Yuan dynasty. Diageo’s takeover in 2006 has further strengthened Swellfun’s strategic focus in the midrange to subpremium markets, positioning the company well amid the sector’s premiumization trend.

Swellfun's earnings deteriorated sharply in 2025, with revenue and net profit tumbling 42% and 70% year on year, respectively. The weakness extended into the first quarter of 2026, as revenue and net profit fell a further 15% and 10%.

Narrow-moat-rated Sichuan Swellfun, or Swellfun, is one of the key subpremium baijiu brands in China with aged cellars dating as far back as the late Yuan dynasty. Diageo’s takeover in 2006 has further strengthened Swellfun’s strategic focus in the midrange to subpremium markets. This positions the company well amid the sector’s premiumization trend, allowing it to generate economic profits well into the future, in our view.

Our channel checks continue to indicate persistent weakness in baijiu demand, with the sector facing double-digit revenue declines ahead of the Lunar New Year holiday. However, performance varies across segments—premium baijiu, led by Moutai, is showing signs of modest demand improvement.

Subpremium baijiu companies' third-quarter results continue to reflect persistent demand weakness and elevated inventory levels. Among them, Swellfun posted a 75% year-on-year decline in net profit, while Yanghe and Jiugui reported net losses.

Narrow-moat-rated Sichuan Swellfun, or Swellfun, is one of the key subpremium baijiu brands in China with aged cellars dating as far back as the late Yuan dynasty. Diageo’s takeover in 2006 has further strengthened Swellfun’s strategic focus in the midrange to subpremium markets. This positions the company well amid the sector’s premiumization trend, allowing it to generate economic profits well into the future, in our view.

Our channel checks continue to indicate persistent weakness in China's consumer sentiment and elevated inventory levels for Baijiu. Golden Week sales for the sector declined by 20%-30% year on year, and inventory levels have increased by about one month.

Narrow-moat-rated Sichuan Swellfun, or Swellfun, is one of the key subpremium baijiu brands in China with aged cellars dating as far back as the late Yuan dynasty. Diageo’s takeover in 2006 has further strengthened Swellfun’s strategic focus in the midrange to subpremium markets. This positions the company well amid the sector’s premiumization trend, allowing it to generate economic profits well into the future, in our view.

Swellfun's June-quarter performance deteriorated sharply, with revenue falling 31% year on year, and a net loss of CNY 85 million, making it one of the weakest performers in our baijiu coverage.

Swellfun reported year-on-year growth of 5% in revenue and 6% in net profit for 2024, followed by 3% revenue growth and a 2% increase in net profit in the first quarter of 2025.

Narrow-moat-rated Sichuan Swellfun, or Swellfun, is one of the key subpremium baijiu brands in China with aged cellars dating as far back as the late Yuan dynasty. Diageo’s takeover in 2006 has further strengthened Swellfun’s strategic focus in the midrange to subpremium markets. This positions the company well amid the sector’s premiumization trend, allowing it to generate economic profits well into the future, in our view.

Amid China's macroeconomic and consumption headwinds, our baijiu coverage trailed the broader market in 2024, falling 19% on average, compared with a 13% rise in the Shanghai Composite Index.

Near-term headwinds in the macroeconomy have weakened baijiu demand and the sector’s profitability, with slower year-over-year sales growth across all segments in the third quarter versus the previous quarter. We expect the cyclical weakness to persist in the next 1-2 quarters, and we remain selective, with a preference on premium and leading brands given their relatively resilient demand.

Despite demand headwinds for subpremium baijiu firms, narrow-moat Sichuan Swellfun’s second-quarter results improved meaningfully on a sequential basis with revenue and net profit rising 16.6% and 29.6% year over year, up from 9.4% and 16.8% growth in the prior quarter. These were largely in line with our expectations. We think the firm has done a good job by shifting its strategic focus to promote its mid- to high-end product Zhenniang No. 8 to address challenges in the subpremium segment. This, coupled with greater efforts in optimizing sales and marketing costs has boosted net margin and profit growth. Our channel check indicates the firm’s inventory levels remain at about two months, which is healthy and should pave the way for Swellfun to benefit from upcoming restocking demand ahead of the Mid-Autumn Festival and National Day in China. We maintain our earnings forecasts and fair value estimate of CNY 66 per share. We think the shares are currently undervalued.

Narrow-moat-rated Sichuan Swellfun, or Swellfun, is one of the key subpremium baijiu brands in China with aged cellars dating as far back as the late Yuan dynasty. Diageo’s takeover in 2006 has further strengthened Swellfun’s strategic focus in the midrange to subpremium markets. This positions the company well amid the sector’s premiumization trend, allowing it to generate economic profits well into the future, in our view.

Subpremium baijiu companies continued to witness varying degrees of sales pressure in 2024 as the segment’s demand is mainly driven by business-related socializing, which is closely tied to overall economic conditions in China and sees slower demand recovery compared with premium and mass market baijiu. As such, we lower our fair value estimates of subpremium baijiu stocks—Jiangsu Yanghe to CNY 160 per share from CNY 177, Sichuan Swellfun to CNY 66 from CNY 71, and Jiugui to CNY 71 from CNY 82, to factor in the weak demand outlook. We think the shares of Yanghe, Swellfun, and Jiugui are undervalued currently, but near-term demand recovery remains uncertain amid slower domestic economic growth and soft consumer sentiment. Our preferred picks in the sector are wide-moat Luzhou Laojiao and Wuliangye as we believe these companies will be resilient despite economic swings, underpinned by their strong brand heritage, supreme product quality, and extensive distribution networks.

We expect the China baijiu sector to extend its sluggish sales into first quarter 2024, which is reflected in lower wholesale prices and higher inventory levels for the sector as a whole compared with a year ago. However, performance was divergent across segments. Our channel checks suggest demand for premium baijiu and mainstream-focused local brands remains resilient. In contrast, subpremium brands, except Shanxi Fen Wine, have witnessed varying degrees of sales pressure, as demand is closely tied to overall economic conditions. This is mainly in line with our earlier assumptions, and we maintain both our earnings forecasts and fair value estimates for the baijiu names we cover.

Despite current sluggish consumption in China, wide-moat Luzhou Laojiao and narrow-moat Sichuan Swellfun both posted decent third-quarter results, with net profit rising 29.4% and 19.6% year on year, respectively. The results were largely within our expectations, as premium baijiu continued to enjoy resilient demand, while expansion nationally has further boosted sales growth. We expect the solid growth momentum for both companies to continue in the coming quarters, boding well for a strong start in 2024. We maintain our fair value estimates of Laojiao at CNY 259 per share and Swellfun at CNY 71, and at the current levels, we think both shares of Laojiao and Swellfun are slightly undervalued.