Industrial Securities Co.,Ltd. released a research report indicating that with current market volatility increasing, the window for style rotation from previously extreme sector divergence has opened. Finding high-win-rate assets has become a cost-effective investment theme. On one hand, the Food & Beverage sector has cleaned up its positioning, with institutional holdings at historic lows. The sector's valuation has dropped significantly, providing a relatively ample safety cushion. On the other hand, many high-quality consumer companies have solid business foundations, strong cash flow generation capabilities, and continuously optimized dividend policies. Their high dividend yields can offer solid absolute returns, and if demand improves marginally in the future, there is potential for valuation recovery gains.

Industrial Securities main views are as follows:

Building a Research Framework for Dividend Assets from Five Dimensions

1) Earnings Stability: Focus on the fluctuation range of net profit attributable to parent company over the past five years, preferring targets with fewer instances of significant earnings declines and controllable fluctuation in the earnings center. Stable earnings are the foundation for long-term dividends. Other indicators include gross margin, net profit margin stability, and historical ROE volatility (high net profit margin and high turnover lead to stronger ROE stability).

2) Adequacy of Cash Flow: Use the ratio of net operating cash flow to net profit attributable to parent company. A ratio consistently greater than 1 indicates that book profits can be converted into real cash, providing the source of funds for dividends.

3) Health of the Balance Sheet: Prioritize targets with low asset-liability ratios, small interest-bearing debt scales, and ample cash on hand. Lower debt repayment pressure means less passive squeezing of dividend funds.

4) Capital Expenditure Needs: Assess expansion pressure through the ratio of capital expenditure to net operating cash flow. A ratio less than 30% generally indicates the industry is mature and does not require continuous cash consumption for expansion, allowing surplus cash flow to be used for shareholder returns. A ratio between 30%-60% suggests relatively low capital expenditure pressure.

5) History of Dividend Continuity: Examine whether the dividend payout ratio has been stable or increasing over the past three years, and pay attention to the company's medium to long-term shareholder return plans. Avoid the trap of one-time high dividends or unsustainable dividends.

The Baijiu Sector is at the Bottom of the Cycle

Market expectations are fully priced in, leaving limited downside for stock prices, and dividend yields are highly attractive. From three perspectives – market, financial reports, and positions – the Baijiu sector appears to have bottomed out: 1) Demand-wise, sell-through has improved month-on-month since the start of the year, with potential for year-on-year growth in the second half. The risk of further price declines for most companies has narrowed, with prices entering a stable range. 2) Financial reports for the first half of 2026 are expected to continue the downward trend, with significant sector-wide deleveraging. This suggests financial reports have largely bottomed out, improving the confidence in earnings. 3) Sector stock prices have fallen over 60% from their 2021 peak, breaking through the lows seen after the Q2 policy shock and before the September 924 policy stimulus. Current valuations are at the 27th and 14th percentile levels since 2012 and 2016, respectively. Fund holding ratios continue to decline, with the Baijiu sector's overweight allocation ratio falling to 2.09% in Q2 2026 (a sequential decrease of 2.42 percentage points, moving to underweight), indicating a relatively clean position clean-out. Although the short-term fundamentals have not yet fully recovered, leading baijiu companies have strong brand moats and ample cash on hand. They are continuously increasing shareholder returns to support stock prices, making them attractive from an absolute return perspective at current levels.

Kweichow Moutai Co., Ltd. (SHA: 600519) has strong earnings stability and a dividend yield of over 4%, making it suitable as a core portfolio asset. Luzhou Laojiao Co., Ltd. (SZA: 000568), Shanxi Xinghuacun Fenjiu Factory Co., Ltd. (SHA: 600809), Anhui Gujing Distillery Co., Ltd. (SZA: 000596), Jiangsu Jinsheng Yuan Industry Co., Ltd. (SHA: 603369), and Anhui Yingjia Distillery Co., Ltd. (SHA: 603198) have dividend yields generally between 4% and 7% and low valuations. If a right-side fundamental signal is confirmed, they offer significant potential for valuation recovery gains.

Mass Consumer Goods Sector Offers Several Targets with Dividend Yields Over 4%

Based on industry characteristics and company specifics, these can be broadly divided into three categories:

1) Stable Performance Targets, such as Chengde Lolo Co., Ltd. (SZA: 000848), Henan Shuanghui Investment & Development Co., Ltd. (SZA: 000895), Chongqing Brewery Co., Ltd. (SHA: 600132), Inner Mongolia Yili Industrial Group Co., Ltd. (SHA: 600887), and Tsingtao Brewery Co., Ltd. (SHA: 600600). These companies operate in mature industries with stable competitive landscapes, deep moats for leading enterprises, consistently strong operating cash flow, and sustainable high-dividend policies. Their earnings have low volatility, making them suitable for allocation funds seeking stable returns.

2) Relatively Superior Growth Rate Targets, such as Youyou Foods Co., Ltd. (SHA: 603697), Bab Foods Co., Ltd. (SHA: 605338), Qianhe Condiment and Food Co., Ltd. (SHA: 603027), Tianmei Food Co., Ltd. (SHA: 603317), Jinzi Ham Co., Ltd. (SZA: 002847), Baoli Foods Co., Ltd. (SHA: 603170), and Anjoy Foods Group Co., Ltd. (SHA: 603345). Although their historical earnings have shown periodic volatility, their revenue and profit compound growth rates are expected to reach double digits over the next three years. They maintain a high dividend payout ratio while keeping capital expenditure reasonable.

3) Companies with High Payout Ratios but Relatively Weaker Earnings Stability, such as Garden Co., Ltd. (SHA: 603886), Zhejiang Liziyuan Food Co., Ltd. (SHA: 605337), Chacha Food Co., Ltd. (SZA: 002557), and Beijing Toly Bread Co., Ltd. (SHA: 603866). Their profitability is susceptible to factors like raw material prices, industry competition, and channel disruptions, requiring continuous monitoring of cash flow changes.

Investment Advice

Combining the dividend framework, three categories of absolute return assets are recommended:

First, prioritize dividend core assets with strong earnings stability. Recommended: Kweichow Moutai, Yili Industrial Group, Shuanghui Development, Chongqing Brewery, and Tsingtao Brewery. These provide consistent dividend returns and withstand market volatility.

Second, dividend yield foundation plus valuation recovery. Recommended: Shanxi Fenjiu, Gujing Distillery, and Luzhou Laojiao. With fundamentals bottoming out and expectations fully priced, future earnings improvements offer a call option for valuation recovery.

Third, offensive and defensive. Recommended: Anjoy Foods and Qianhe Condiment. Monitor Baoli Foods and Tianmei Food. These combine growth attributes with dividend protection.

Risk Warning: Consumption recovery falling short of expectations, intensifying industry competition, significant raw material price fluctuations, and food safety risks.