According to a recent research report, CMSC suggests that the sector's current valuation decline is relatively full, with the market pricing in overly pessimistic expectations. The dividend yields of leading companies are attractive compared to other sectors. Simultaneously, price indices have stabilized and begun to recover, companies are continuing to shed historical burdens, and operational health is improving, indicating pessimism at the bottom is unwarranted.

Looking ahead to the second half of the year, the report recommends focusing on three key themes: 1) Theme One: Volume and price recovery under expectations of CPI improvement; 2) Theme Two: Growth categories where valuations have returned to reasonable ranges; 3) Theme Three: Dividend support, with early positioning for demand recovery. CMSC's main views are as follows:

In the first half of the year, baijiu (Chinese spirits) experienced a one-sided decline, while the mass-market consumer goods index saw a significant correction in Q2, with relatively low capital allocation ratios. From an industry perspective, although demand is weak, there are positive signals: catering demand continues to outperform the broader market, core CPI is rising moderately, and industry competition is easing. Leading companies are actively adapting and continue to gain market share.

The current sector valuation decline is relatively full, with the market pricing in overly pessimistic expectations. The dividend yields of leading companies are attractive compared to other sectors. Simultaneously, price indices have stabilized and begun to recover, companies are continuing to shed historical burdens, and operational health is improving, indicating pessimism at the bottom is unwarranted.

Key Investment Themes for H2

Looking ahead to the second half of the year, the report recommends focusing on three key themes: 1) Theme One: Volume and price recovery under expectations of CPI improvement, recommending YouRan Dairy, Haitian Flavouring & Food Company Ltd (A+H), Yihai International, and Zhongju High-tech; 2) Theme Two: Growth categories where valuations have returned to reasonable ranges, primarily recommending Nongfu Spring, also recommending Bairun Co.,Ltd., Dongpeng Beverage, and Youyou Foods Co.,Ltd., while keeping an eye on Yanjing Beer and West Cereal Food Co.,Ltd.; 3) Theme Three: Dividend support, with early positioning for demand recovery. For baijiu, focus on Kweichow Moutai, Shanxi Xinghuacun Fen Wine Factory, and Yingjia Distillery. For Hong Kong stocks, it recommends China Resources Beer and suggests watching Weilong Delicious Global Holdings.

Market Performance Review

Baijiu experienced a one-sided decline, while mass-market consumer goods corrected significantly in Q2. As the first half of 2026 nears its end, the baijiu sector saw a brief rebound at the start of the year but trended downwards for the remaining time. The CSI Baijiu Index has fallen 24% year-to-date, with significant divergence among individual stocks, with Moutai performing relatively better. In terms of holdings, shareholder concentration has decreased, with active funds, Hong Kong capital, and national team investors continuously reducing positions, while passive funds and individual investors have increased holdings. The food index outperformed the CSI 300 in Q1, mainly due to improved demand during the Spring Festival peak season providing earnings support, coupled with safe-haven capital flows amid geopolitical conflicts. However, it has corrected significantly since Q2. By sub-sector, the catering chain performed better due to earnings improvement, while new consumption stocks retreated from highs. From an allocation perspective, fund holdings across all sub-sectors have declined, with capital still in an outflow pattern.

Industry Status

Demand is weak but not without positive signals. 1) Overall demand: Total retail sales have been under pressure this year, but catering has consistently outperformed the broader market. Core CPI is rising moderately, while food CPI remains pressured mainly due to pork prices. With catering demand recovering and inflation expectations, price increases have begun to emerge. Per capita consumption prices in the catering sector have stabilized, and price wars have essentially ended. In retail, some companies are attempting direct price increases or reducing promotions to cope with cost pressures. 2) Industry perspective: 26Q1 continued to show a recovery trend. The catering chain and seasonings benefited from accelerating catering demand recovery, while dairy, soft drinks, and snacks showed significant marginal improvement. Simultaneously, the level of competition within the industry has eased somewhat. Represented by seasonings, after 2024, companies began actively controlling capital expenditure, and the period of large-scale industry capacity expansion has passed. In recent years, companies' sales expense ratios have improved, indicating a more certain competitive landscape. 3) Corporate perspective: Facing the current economic environment changes, many traditional mass-market consumer goods industries have entered a period of low-speed growth. Industry leaders are actively seeking change, leveraging stronger financial strength, channel control, and supply chain advantages to seek incremental opportunities. For endogenous growth, companies are seeking product diversification and cultivating new growth drivers, such as Haitian actively promoting growth in small categories and Bairun exploring the growth potential of whiskey. They are also actively exploring global expansion, seeking broader space, such as Xianle attracting global capital with the long-term goal of becoming the global leader, Angel Yeast actively deploying overseas capacity and M&A opportunities for rapid growth, and Yihai introducing overseas channels to maintain rapid growth. For external M&A, companies represented by Tianwei are actively seeking M&A opportunities to integrate resources for comprehensive development.

Baijiu Sector

Emerging from the darkest hour, grasping sequential recovery. 25Q4 single-quarter revenue fell 29.6% year-on-year, the deepest quarter of this adjustment cycle, with Moutai experiencing its first full-year earnings decline since listing. In 26Q1, industry revenue/profit declines narrowed to -0.7%/-1.8%. Moutai and Yingjia Distillery's revenue turned positive in Q1, indicating the industry is emerging from its darkest hour. Companies like Jinshiyuan and Gujing are expected to turn positive sequentially in Q2-Q3; monitor the recovery pace of liquor companies. Compared to the previous adjustment cycle (10-14 years), this round saw a larger revenue decline (-18.1 ppts vs -13.4 ppts), a similar profit decline, a slightly lower PB valuation decline but an absolute level still higher than the previous bottom, and a stock price drawdown slightly exceeding the previous round. Among them, Moutai and Fenjiu showed notable resilience, while Wuliangye, Luzhou Laojiao, and Yanghe adjusted more deeply. On the price front, Moutai was the first to stop declining during the off-season (the bulk price of Feitian recovered to 1,630 yuan), while the industry as a whole is still bottoming out. On the inventory front, industry inventory has been declining from its peak (24Q3) but still requires time to reach healthy levels. Moutai's market-oriented reforms (iMoutai's "full shift to C", price marketization, product pyramid, brand globalization) have achieved initial results, with iMoutai revenue reaching 21.6 billion yuan in 26Q1, up 267% year-on-year. Currently, the CSI Baijiu Index trades at 19.52 times PE (TTM), at the 11.96th percentile over the past 10 years. The expected 2026 dividend yields for leading companies are mostly above 4%, providing solid safety margins.

Mass-Market Consumer Goods

Prioritizing competitive landscape, closely watching growth. Since the beginning of 2026, influenced by geopolitical conflicts, commodity prices have risen. Among them, PET and crude oil saw the highest increases, but overall raw material costs are controllable. Looking at the second half of the year, cost pressures may persist. Seasonings are gradually facing cost increases, while beverages and snacks are still affected by packaging material and oil prices. 1) Against the backdrop of weak demand recovery, prioritize competitive landscape, focusing first on volume and price recovery under expectations of CPI improvement. Dairy product milk prices are expected to stabilize and rise, with leading dairy farm operators' performance materializing first. Downstream leading dairy companies' fundamentals are recovering, and valuations are low, entering a layout interval again. Seasonings benefit from catering demand recovery and companies operating with lighter burdens; Q1 earnings exceeded expectations. Leading company Haitian remains strong, the second tier is gradually completing adjustments and emerging from difficulties. The catering chain features differentiated competition, with concentration continuing to increase, and the sector has a strong ability to pass on price pressures. Beer demand is resilient, with low valuations and high dividends providing a solid safety margin; monitor structural improvements in average selling prices. 2) Closely watch growth; some sub-sectors still have a penetration rate increase logic. Beverage packaging drives industry growth. Under the health trend, monitor the growth elasticity of large single products like sugar-free tea and functional water. Snack brands continue to expand in discount retail channels. Although channel红利 is diminishing at the margin, leading companies still maintain a double-digit pace of store openings, with fresh snacks poised for growth.

Risk Factors

Potential risks include demand recovery falling short of expectations, intensifying industry competition, rising costs, and product innovation or channel expansion falling short of expectations.