Kweichow Moutai reported a rare quarterly earnings decline in 2Q26, with total revenue down 5.2% YoY to RMB37.6bn and attributable net profit down 6.9% to RMB17.3bn, mainly reflecting weaker demand for non-standard Moutai products and ongoing channel restructuring in the series liquor business. Despite near-term earnings pressure, demand for core Feitian Moutai remained resilient, while the company will continue to enhance its direct-sales and consumer-facing strategy.

Feitian Resilient while Non-Standard Products Under Pressure: Moutai liquor revenue declined by around 1% YoY to RMB31.7bn, accounting for 86% of liquor revenue, up around 4 ppts YoY. Following an 8.5% hike in the contracted price for 53-degree 500ml Feitian Moutai at the end of March from RMB1,169 to RMB1,269, 2Q26 has fully captured the pricing benefit. Channel checks also indicate LSD growth in Feitian sell-through, suggesting resilient underlying demand for the core product. In contrast, 2Q26 was the first full quarter subsequent to the change of agency-based model for non-standard Moutai products. Amid softer end demand and deliberate supply reductions, shipments of non-standard products reportedly fell by around 30% YoY in some regions, offsetting the positive contribution from Feitian pricing.

Series liquor remained weak due to channel restructuring: Segment’s revenue declined by around 25% YoY to RMB5.1bn. The company continued to rationalize its distributor network, with domestic distributors down by a net 46 in 1H26 to 2,307 at end-2Q26 as new channel resources were added following the earlier clean-up. Selling expenses also fell 9.3% YoY in 2Q26, given the heavier reliance of series liquor on channel promotion, the more restrained marketing support may have limited near-term sales momentum.

Increasing direct sales allows better pricing and inventory control: Direct-sales revenue rose around 33.6% YoY to RMB22.5bn, with its share of liquor revenue increasing by 18 ppts YoY to 61.1%. iMoutai contributed RMB18.7bn during the quarter, equivalent to nearly half of total revenue and around 83% of direct sales. Wholesale and agency revenue, meanwhile, fell around 35% YoY to RMB14.3bn, reducing its share of liquor revenue to 38.9%. The continued channel migration toward direct sales gives management greater control over pricing and inventory.

Margin pressure remained the key drag on earnings: GPM stood at 89.4% in 2Q26, down around 1.1 ppts YoY and 0.5 ppts QoQ. The positive impact from a higher direct-sales mix and Feitian price increases were offset by weak demand on non-standard products, lower overall realized pricing and higher production costs. Operating expenses declined 4.2% YoY to RMB3.4bn, while the OPEX ratio edged up 0.1 ppt to 9.15%, mainly due to lower selling expenses and disciplined marketing spending despite the rapid increase in direct sales. However, the improvement in expenses was insufficient to offset GPM pressure, resulting in attributable net profit falling 6.9% YoY to RMB17.3bn and NPM declining around 0.8 ppt to 46%.

The balance sheet and cash flow remained solid. Net cash exceeded RMB53bn at end-2Q26. Contract liabilities fell around 60% YoY to RMB3.18bn, mainly due to the shift toward direct sales and changes in advance-payment policies.  There was an increase of around RMB150mn QoQ, showing no further deterioration. Cash received from product sales reached around RMB42bn in 2Q26, up around 8% YoY, indicating continued strong cash collection.

Our View: It is believed that 2Q26 earnings missing expectations mainly because the market has overestimated the revenue benefit from Feitian pricing and underestimated the drag from weak demand on non-standard products and channel restructuring for series liquor, while the high base last year has also amplified the YoY decline.

Nevertheless, the pressure was broadly consistent with our previous expectation of near-term disruption during the channel transition. Moutai’s shift toward direct sales and a more consumer-facing model is broadening customer reach and giving management greater control over pricing and supply.

Operating indicators have started to improve going into 3Q26. Offline direct-sale prices were raised twice between July and August, from RMB1,639 to RMB1,753, while iMoutai pricing remained at RMB1,639, reflecting a more market-oriented and differentiated pricing approach across direct channels. Recent channel feedback suggests inventory among Feitian distributors remained at around half a month, and most self-operated stores had already completed 70% of their full-year sales targets by mid-year. The upcoming Mid-Autumn Festival and National Day peak season are key to 3Q–4Q26. If sell-through remains stable, full-year revenue and earnings could return to low-single-digit growth.

We believe Feitian Moutai’s core brand strength remains intact, but pricing is increasingly shifting from financially driven premiums toward genuine consumption demand. The key swing factors will be whether Feitian pricing remains resilient as prices and supply increase, and whether non-standard sell-through improves during the peak season. With earnings recovery likely to remain gradual, we would view a meaningful valuation pullback as a more attractive entry opportunity, provided Feitian pricing and cash flow remain resilient. The counter is trading at 19x FY26E P/E and 4% dividend yield. (Research Department)