This Lunar New Year, Chinese baijiu sales remain sluggish, and Morningstar Equity Research analyst Jennifer Song believes “cyclical weakness” in demand for Chinese liquor will persist into 1Q2025 despite China’s recent stimulus measures.
While Song expects this will dampen both baijiu demand and the sector's profitability, she urges investors to “stay selective” on premium brands.
“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,” writes Song in a Jan 14 note.
Morningstar’s channel checks suggest that consumer sentiment remains weak, and distributors are cautious about stocking inventory. “Currently, we estimate the sector’s sales stand at 10%-20% of the 2025 sales target, down from 20%-30% of the 2024 target ahead of Lunar New Year a year ago,” says Song.
Despite sector-wide weakness, Song believes performance will likely diverge, with premium baijiu and mainstream-focused leading local brands remaining “relatively resilient”, while high-end to sub-premium products face greater pressure as demand is closely tied to economic conditions.
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Song says the “challenging” 2025 demand outlook has already been reflected in her forecasts, and she maintains her fair value estimates for all 10 baijiu companies under her coverage.
“We believe the 10 baijiu companies we cover are all undervalued, and Kweichow Moutai is our preferred pick,” writes Song.
With a RMB1,780 ($331.96) target price, Morningstar has a four-star rating on Kweichow Moutai against Morningstar’s five-tier scale, which means “appreciation beyond a fair risk-adjusted return is likely”.
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“We believe Moutai's unique cultural status, unmatched brand image and outstanding product quality make it the best-positioned to weather the current sector headwinds. These factors also allow it to benefit from the sector's premiumisation trend over the mid to long term,” says Song.
Despite the near-term demand headwinds, some baijiu companies have increased their dividend payout ratios. This should lift investor confidence, notes the analyst.
“In particular, Moutai raised its regular payout ratio to a minimum of 75% through 2024-2026, up from 51.9% over the past six years,” she adds. Song’s 2024 estimated dividend per share of RMB51, or a 75% payout ratio, currently implies a dividend yield of 3.5%.
Meanwhile, Wuliangye Yibin and Jiangsu Yanghe Distillery Co have also committed to a minimum 70% payout ratio, with cash payouts of no less than RMB7 billion and RMB20 billion, respectively, in 2024-2026.
The minimum dividend commitments imply at least RMB5.41 per share for Wuliangye Yibin and RMB4.65 per share for Jiangsu Yanghe Distillery Co, with respective dividend yields of 4.2% and 5.9% currently, says Song.
Morningstar has four-star ratings on both Wuliangye Yibin and Jiangsu Yanghe Distillery Co, with target prices of RMB196 and RMB128 respectively.
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Other brands under Morningstar’s coverage are the four-star-rated Sichuan Swellfun Co (RMB66 target price), Shanxi Xinghuacun Fen Wine Factory Co (RMB259), Anhui Yingjia Distillery Co (RMB66), Anhui Gujing Distillery Co (RMB236) and Jiuhui Liquor Co (RMB62).
Two of the 10 brands have a five-star rating from Morningstar, which means analysts “believe appreciation beyond a fair risk-adjusted return is highly likely over a multi-year time frame”. Morningstar’s rating also means “scenario analysis developed by [its] analysts indicates that the current market price represents an excessively pessimistic outlook, limiting downside risk and maximising upside potential”.
These two baijiu brands with large upside potential, according to Morningstar, are Luzhou Laojiao Co, with a RMB228 target price; and Hong Kong-listed ZJLD Group, with a HK$12.20 ($2.14) target price.
Both fair value estimates imply approximately 100% upside from their current trading prices.
