The landscape of the Chinese liquor industry, particularly the white liquor segment, has been on a tumultuous journey, with current market trends indicating a complex and possibly challenging outlook for the foreseeable futureAs various fund managers vie to navigate through the intricacies of the financial scenarios laid before them, their assessments of the situation reveal a mixture of caution, anticipation, and strategic positioning regarding investments in this pivotal sector.

With the release of the fourth quarter reports for 2024 from public funds from January 20 to January 22, a notable pattern emergedFollowing a significant surge at the end of the third quarter, consumer funds that typically manage over a hundred billion in assets faced a market correction as stock prices began to decline once againThe two major industry players, the "largest liquor fund" – the CSI Alcoholic Beverage Index and E Fund Blue-chip Selected Mixed Fund managed by Zhang Kun, saw their asset scales plunge back below 500 billion yuan and 400 billion yuan respectively

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Other funds heavily invested in liquor stocks, such as Huatai-PineBridge Consumption Industry Mixed Fund, demonstrated similar patterns of decline, with overall market enthusiasm clearly waning.

As we transitioned into the third quarter of 2024, the pace of growth for major liquor stocks noticeably slowed downAn analysis conducted earlier by 21st Century Business Herald indicated that among twenty A-share liquor companies, only eleven of them managed to record growth, with just seven achieving double-digit increasesThe situation worsened in January 2024, as more mid-sized liquor companies like Jinzhongzi Liquor reported losses, forcing several leading brands to halt supplies temporarily in a bid to stabilize their pricing strategies.

This cooling sentiment in the market has sparked further differentiation in stock holdingsDuring the fourth quarter, actively managed funds adopted a tendency to slightly reduce their stakes in liquor stocks, while passive funds, on the other hand, continued to ramp up their holdings

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Observations from various fund managers underscore a prevailing sentiment of muted demand within liquor channels, leaving little room for optimistic market expectationsThe white liquor sector seems to be undergoing a depreciation phase in terms of valuation, at least in the short run.

Despite these sobering insights from quarterly analyses, fund managers have been eager to highlight the strengths of the white liquor industry, notably its robust business models and the commitment of leading players to increase dividend payouts, suggesting a potential for more favorable returns once the fundamental aspects find stabilityFor instance, many first-tier liquor companies are poised to implement significant interim dividends, presenting this as a reassuring sign for long-term investors.

Interestingly, following a remarkable surge in the third quarter of 2024, several active funds heavily invested in liquor stocks opted to lighten their positions as the fourth quarter approached

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Liu Yanchun, a notable fund manager, managed a fund whose top ten holdings included half from the liquor sectorAfter a slight recovery in asset size during the third quarter, this fund regressed again in the fourth quarter to record a new low for the yearThe strategy entailed minor reductions in holdings of major companies like Kweichow Moutai and Wuliangye along with decreases in other consumer stocks.

In the same vein, Huatai-PineBridge's Consumption Industry Mixed Fund revealed a similar trend, reporting slight reductions in Moutai and Wuliangye, while increasing positions in appliance brands like Haier and GreeThe overarching theme within the market has been a retreat into uncertainty, especially following a turbulent fourth-quarter performance across the broader index.

The current demand scenario for white liquor remains lackluster, particularly during what is traditionally considered the peak season

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The ensuing "Double 11" e-commerce promotions adversely impacted liquor pricing, compelling many distributors with excess stock to offload alcohol at discounted pricesEntering the festive season leading to the Lunar New Year, several highly regarded liquor brands proactively decided to pause supplies of their core products to safeguard price integrity further.

Per Hu Xinwei, who manages the Huatai-PineBridge fund, the consumer sector's fourth-quarter performance has underwhelmed, leading to a greater anticipation for more positive signals from the marketThere is a paradoxical realization — despite the slower pace, the collective realization by leading liquor companies regarding inventory control signals a transition, indicating a necessary reduction in output to recalibrate expectations.

Additionally, within the domains of passive funds managing white liquor indices, albeit experiencing a drop in scale, investors have persisted in enhancing their buying power

Notably, two large index funds have demonstrated remarkable purchase volumes, with the Shenzhen Securities Alcoholic Beverage Index witnessing a surge in subscription shares back to over 10.5 billion — a level not seen in two yearsEqually impressive was the Penghua CSI Liquor ETF, which experienced record subscriptions totaling 21.34 billion, marking its strongest performance in five years.

This infusion of investment has led these funds to increase their stakes in liquor stocks, particularly those demonstrating robust performanceFor example, the two funds increased their holdings in Jinshiyuan by significant margins, thereby implying a concentrated interest in companies believed to have resilient fundamentals.

However, despite the overall bearish sentiment featuring a marked decline within the region of consumer stocks, fund managers remain hopeful about the underlying long-term value of these assets

They posit that the recent retracement may underscore a substantial allure of the liquor sector, especially as it transitions through an unprecedented period of correction.

Its current standing implies that many companies with stable asset balances and cash flows are poised to deliver strong dividends, even as macroeconomic sentiment swaysThe realization that certain stocks can embody both high quality and high dividend returns is becoming increasingly feasible, as evidenced by the burgeoning yields from major firmsThe dividend expectation from Kweichow Moutai and Wuliangye stands impressively above 3.5%, while Luzhou Laojiao surpasses the 4% marks, and Yanghe Brewery is approaching an impressive 6% dividend yield.

In response to a dearth of demand, top-tier liquor companies have taken proactive measures to bolster their attractiveness through enhanced dividends, seeking to retain investor confidence amid a challenging landscape

As of January 24, 2024, several companies are set to implement substantial interim dividends exceeding 49 billion yuan, with many committing to various long-term dividend initiatives, including buyback plans, particularly prevalent within Kweichow Moutai.

In closing, the outlook remains tumultuous yet optimistic for the white liquor industryFund managers convey that should the broader economic indicators favor an uptrend, it could trigger renewed investor confidence in the consumer sector, allowing for a rebound that rectifies current pessimistic growth expectationsThe hope for a healthier economic trajectory and an upward resurgence in retail sales growth could potentially reignite long-term investor sentimentTherefore, the unfolding narrative for the white liquor market seems to be one of cautious optimism, where strategic navigation through emerging signals holds the key to future investment viability.