The 2025 Q3 earnings reports for China's liquor sector marked the worst quarter in a decade. Among the 21 listed liquor companies, only a few—including Kweichow Moutai Co.,Ltd. and Shanxi Xinghuacun Fen Wine Factory Co.,Ltd.—managed to maintain profit growth, while most saw sharp declines, with some reporting 30%-40% drops. Notably, Kouzijiao Liquor's Q3 net profit plunged by 90%.

During the previous downturn in 2013-2014, liquor stocks suffered widespread earnings contractions, with price-to-earnings (P/E) ratios falling to single digits—Moutai below 9x, and Wuliangye Yibin Co.,Ltd. and Luzhou Laojiao around 6x. Despite bearish sentiment, investors like Dan Bin and Lin Yuan closely monitored Moutai's inventory movements to gauge actual sales.

The current cycle mirrors past trends: years of capacity expansion and price hikes have collided with weakening demand, leading to price inversions, bloated channel inventories, and slowing sales. Policy tightening in 2025 has further strained the industry.

**Improved Resilience** Among the 15 liquor firms that endured the last downturn, revenue and net profit declines in 2025 Q3 were milder (-4.5% and -5.5%, respectively) compared to 2013-2014 (-2.9%/-14.8% and -5.8%/-22.5%). More leading players—Moutai and Fenjiu—achieved dual growth in revenue and profit this time. Wuliangye narrowed its net profit decline to under 14%, while Luzhou Laojiao improved significantly, limiting drops to single digits.

**Stronger Profitability and Reserves** The sector’s combined net profit for 2025 Q3 stood at ¥117.56 billion ($16.5 billion), with top players contributing over 95%. Moutai alone accounted for half. Total undistributed profits reached ¥468.8 billion ($65.8 billion), five times the 2013 level. Moutai’s reserves grew sevenfold, while Fenjiu’s surged 14-fold.

Gross margins also improved: Wuliangye rose from ~70% to over 80%, Moutai held above 90%, and Luzhou Laojiao’s high-end products now drive 90% of revenue with an 87% margin.

**Controlled Spending** Unlike the 2013-2014 "spending wars," where sales expense ratios exceeded 30% for some, firms now show restraint. Wuliangye’s ratio dipped to ~10%, Fenjiu halved its spending, and Moutai maintained a lean 3.5%.

**Channel Confidence** Dealer prepayments (contract liabilities) grew 3.6% YoY in 2025 Q3, contrasting with the 48.5% plunge in 2013. Top players like Wuliangye and Luzhou Laojiao saw increases, though Moutai’s reserves dipped 22% due to reduced Q3 shipments.

**Cash Flow Strains** Operating cash flow for the 15 firms fell 19% YoY, with five smaller players turning negative. Niulanshan (a subsidiary of Shunxin Agriculture) reported consecutive negative cash flows, signaling stress.

**Market Sentiment vs. Fundamentals** Despite stronger fundamentals, sector valuations remain depressed, reflecting long-term demographic concerns. As Ray Dalio noted in *Principles*, extreme pessimism may signal opportunity—a lesson from the 2021 peak (P/E ratios of 50-80x) to today’s undervaluation.

The liquor sector’s enhanced resilience and reserves suggest it is better equipped for this downturn, yet market sentiment lags behind operational improvements.