China Baijiu Earnings: Headwind Persists for Subpremium Firms; Cutting Fair Value by 7%-13%

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.