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.

Boasting a long and rich history, Shanxi Fen Wine is known as the original distiller of light-flavored baijiu and was often mentioned in ancient and contemporary Chinese literature. We believe the extensive history and quality of products have established a strong competitive advantage in brand strength and pricing power, making it the only premium brand among the light-flavored baijiu beverages. Years of channel development and deepening cooperation with China Resources, which possesses a large distribution network, have also fortressed its competitiveness, which should allow it to generate economic profits well into the future.

Shanxi Fen Wine's first-quarter revenue declined 10% and net profit fell 19% year on year. Nevertheless, cash receipts from sales rose 16% and operating cash flow grew 18% from a year ago. Advance payments also increased by CNY 0.9 billion from the prior quarter.

Boasting a long and rich history, Shanxi Fen Wine is known as the original distiller of light-flavored baijiu and was often mentioned in ancient and contemporary Chinese literature. We believe the extensive history and quality of products have established a strong competitive advantage in brand strength and pricing power, making it the only premium brand among the light-flavored baijiu beverages. Years of channel development and deepening cooperation with China Resources, which possesses a large distribution network, have also fortressed its competitiveness, which should allow it to generate economic profits well into the future.

Shanxi Fen Wine reported 7.5% revenue growth and flat net profit in 2025. The firm committed to a minimum 65% payout ratio for 2025-27, up from an average of 54% over the prior three years.

Despite continued sectorwide demand weakness, our recent channel checks indicate steady sales volume for leading baijiu brands during the Lunar New Year period, with lower inventory levels compared with a year ago.

Boasting a long and rich history, Shanxi Fen Wine is known as the original distiller of light-flavored baijiu and was often mentioned in ancient and contemporary Chinese literature. We believe the extensive history and quality of products have established a strong competitive advantage in brand strength and pricing power, making it the only premium brand among the light-flavored baijiu beverages. Years of channel development and deepening cooperation with China Resources, which possesses a large distribution network, have also fortressed its competitiveness, which should allow it to generate economic profits well into the future.

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.

Boasting a long and rich history, Shanxi Fen Wine is known as the original distiller of light-flavored baijiu and was often mentioned in ancient and contemporary Chinese literature. We believe the extensive history and quality of products have established strong competitive advantage in brand strength and pricing power, making it the only premium brand among the light-flavored baijiu beverages. Years of channel development and deepening cooperation with China Resources, which possesses a large distribution network, have also fortressed its competitiveness, which should allow it to generate economic profits well into the future.

Shanxi Fen Wine's third-quarter operating performance improved sequentially, with revenue rising 4% year on year and net profit falling by 1.4%, compared with a 0.4% sales growth and 13.5% net profit decline in the prior quarter.

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.

Boasting a long and rich history, Shanxi Fen Wine is known as the original distiller of light-flavored baijiu and was often mentioned in ancient and contemporary Chinese literature. We believe the extensive history and quality of products have established strong competitive advantage in brand strength and pricing power, making it the only premium brand among the light-flavored baijiu beverages. Years of channel development and deepening cooperation with China Resources, which possesses a large distribution network, have also fortressed its competitiveness, which should allow it to generate economic profits well into the future.

Shanxi Fen Wine's second-quarter growth decelerated, with revenue rising just 0.4% year on year and net profit falling 13.5%. Gross margin declined by 3.2 percentage points, due to a product mix shift toward lower-end offerings.

Shanxi Fen Wine reported year-on-year revenue and net profit growth of 13% and 17%, respectively, in 2024, followed by a slower growth of 8% in revenue and 6% in net profit for the first quarter of 2025. The firm aims for steady sales growth in 2025, without specifying a target.

Boasting a long and rich history, Shanxi Fen Wine is known as the original distiller of light-flavored baijiu and was often mentioned in ancient and contemporary Chinese literature. We believe the extensive history and quality of products have established strong competitive advantage in brand strength and pricing power, making it the only premium brand among the light-flavored baijiu beverages. Years of channel development and deepening cooperation with China Resources, which possesses a large distribution network, have also fortressed its competitiveness, which should allow it to generate economic profits well into the future.

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.

Wide-moat Shanxi Fen Wine’s second-quarter growth slowed on a sequential basis with revenue and net profit rising 17% and 10% year over year, respectively, compared with 21% and 30% growth in the prior quarter. The results were slightly disappointing, revealing greater sales pressure of subpremium baijiu. Our channel check indicates sales growth of mainstream products and the flagship Qinghua 20 remain robust, while demand of higher-end products is weakened, amid slower economic growth in China. Inventory level stayed at 1.5-2.0 months, which is still heathy and allows the firm to benefit from upcoming restocking demand ahead of the Mid-Autumn Festival and National Day holidays in China. We expect earnings growth to pick up in the coming quarters, and the firm’s target of 20% sales growth in 2024 is achievable.

Despite sluggish consumer confidence in China, wide-moat Shanxi Fen Wine posted solid 22% and 21% year over year sales growth in 2023 and first-quarter 2024, respectively. The robust sales were largely in line with our expectations, but both 2023 and first-quarter net profit came in slightly ahead of our estimates, as lower-than-expected marketing and selling expenses helped to lift operating margins. We keep our 2024-26 revenue assumptions broadly unchanged, but we lift 2024-26 net profit forecasts by 5%-7% amid improving cost efficiencies. Accordingly, we raise our fair value estimate to CNY 259 per share, from CNY 246. We continue to believe Fen Wine is the key beneficiary of rising popularity of light-flavored baijiu in China. We expect expanding sales in the nationwide market, along with the company’s premiumization efforts, to continue to drive a robust sales growth outlook for Fen Wine over the next five years.