“We reiterate and still recommend communication services, consumer cyclical and technology sectors during a market recovery period, but looking at market movement from the first trade war, markets were volatile and trended downward as there were several headline-driven dead cat bounces where the market finally bottomed in 2019,” they add.
Still, Morningstar’s analysts highlight several consumer defensive and “utility-like names” with “attractive” dividend yields and “negligible tariff exposure”. “[These] could see less share decline should more volatility occur.”
Chinese alcohol companies, in particular, remain the “most undervalued names” in the consumer defensive sector, according to Morningstar.
“We think there are attractive dividend-yielding, undervalued [and] wide-moat consumer defensive stocks that are concentrated in the alcohol or baijiu industry,” they write.
While the analysts still expect some near-term consumption weakness, these stocks should remain attractive “if investors look beyond the current downcycle”. In particular, Morningstar’s analysts point to these firms’ “wide-moat ratings due to intangible brand equity”.
All the wide-moat names on Morningstar’s list are baijiu names, referring to the popular Chinese liquor.
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These include Kweichow Moutai, Luzhou Laojiao and Wuliangye Yibin. “All three are considered premium baijiu brands, trading in four-star territory with wide moats due to their intangible brand assets,” say Morningstar’s analysts. “In addition, these stocks provide attractive dividend yields at current levels and provide a safe haven from Trump tariffs as exports are limited to the US.”
Kweichow Moutai
With a rating of four stars against Morningstar’s five-tier scale, Kweichow Moutai remains the analysts’ top pick among Chinese baijiu names.
Morningstar’s current fair value estimate for “wide-moat” Moutai is RMB1,780 ($319.25), and at RMB1,540, the price/fair value estimate is 0.86x.
“It remains our preferred pick within the China baijiu sector. Our channel checks indicate demand for Moutai remains robust, and the pace of year-to-date sales is slightly ahead of a year ago, with distributor inventory at a healthy 20 days, which suggests modest demand despite current consumption weakness,” say Morningstar’s analysts.
Recent earnings show that solid sales growth is outperforming industry peers across all segments, according to Morningstar. “We believe Moutai's unique cultural status, unmatched brand image and outstanding product quality make it the best-positioned to weather the current consumption weakness.”
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In addition, these attributes also allow the firm to benefit from China’s “beverage premiumisation trend” over the long term, say Morningstar’s analysts. “Moutai’s share repurchase plan of RMB3 billion to RMB6 billion and commitment to a 75% dividend payout ratio from 2024 to 2026 should support shareholder return. The current share price implies a dividend yield of 3.7%.”
Wuliangye Yibin
Another top pick is Wuliangye Yibin, whose shares are “undervalued” due to near-term headwinds, says Morningstar. “Likewise with Moutai, we believe that there are macroeconomic and consumption challenges, but our channel checks suggest relatively resilient demand for premium baijiu.”
Morningstar has a four-star rating and a RMB182 fair value estimate on Wuliangye Yibin, above its share price of around RMB127. It also has a much smaller market capitalisation of around RMB494 billion, compared to Kweichow Moutai’s RMB1,934 billion.
Wuliangye’s undervaluation stems from a slowdown from the double-digit growth targeted between 2020 and 2024, but it has already achieved about 50% of its 2025 sales target already in the first quarter, with distributor inventory at a healthy level of 25 days, notes Morningstar.
“Despite growth deceleration and margin pressure, we still believe that it is undervalued and has a wide moat due to its premium product quality and strong brand strength,” they add. “This should support relatively robust demand, while its 70% payout ratio commitment in 2025 translates to an attractive dividend yield of 4.9%.”
Luzhou Laojiao
Fellow baijiu firm Luzhou Laojiao may be even smaller, with a market cap of around RMB175.3 billion, and it also has “relatively weaker brand strength” compared to its peers, says Morningstar.
Furthermore, Luzhou Laojiao has seen temporary disruptions in production scheduling and the launch of a new packaging centre, while macroeconomic and consumption headwinds further intensified margin pressure.
Morningstar’s channel checks also show that year-to-date sales trailed last year’s figures by 10%, with an inventory level of about two weeks higher compared with a year ago.
However, despite near-term headwinds, Morningstar’s analysts still believe Luzhou Laojiao’s shares remain undervalued. “The firm’s competitive strength remains intact, given that it is one of the three premium brands in China.”
Morningstar has a four-star rating on Luzhou Laojiao with a target price of RMB192, above its RMB119 trading price.
Luzhou Laojiao’s 70% payout ratio commitment for 2025 translates to an “attractive” dividend yield of 5.6%, notes Morningstar. “Shares are currently trading at a 0.62x price/fair value estimate ratio.”
Two other undervalued names
Morningstar also recommends two undervalued names with moats: Shanxi Xinghuacun and Budweiser Brewery APAC.
Shanxi Xinghuacun is not considered a traditional premium brand, but rather a leader in the light-flavored baijiu subsegment, which competes in the premium market.
The company's wide moat is derived from its brand equity in the light-flavored subsegment, according to Morningstar.
“While macroeconomic weakness intensified sales pressure, Fen Wine's performance in 2025 so far continues to lead its subpremium baijiu peers, reflecting its strong competitive strength and wide moat,” they add.
Channel checks indicate that Fen Wine's year-to-date sales are slightly ahead of last year, but distributor inventory is about one month higher compared with last year, suggesting some demand headwinds in the subpremium baijiu segment, say the analysts.
However, Fen Wine’s high product quality and strong brand heritage position should benefit from the rising popularity of light-flavored baijiu in China, driving robust sales growth over the long term, they add.
The firm raised its 2024 dividend payout ratio to 60% from 51% a year ago, translating to a 3.5% dividend yield. Shares are currently trading at a 0.80x price/fair value estimate ratio, with Morningstar holding a four-star rating and RMB235 fair value estimate over its RMB188 trading price.
Meanwhile, Budweiser APAC is the market share leader in premium beer and is well-positioned to capitalise on the long-term alcohol premiumisation trend in China, says Morningstar.
Budweiser APAC does not produce any baijiu, and Morningstar is expecting some volume weakness in 1H2025, with volume anticipated to fall 6% y-o-y.
That said, management is expanding into in-home channels and investing in the subpremium segment to partially offset near-term headwinds in its premium segment.
“New management has pledged to raise the operational efficiencies of its distribution network and supply chain, which we view positively. While near-term earnings could be affected by a soft top-line trend, we think these efforts should strengthen the company's long-term competitiveness,” add the analysts.
Budweiser APAC is rated five stars by Morningstar, with a fair value of HK$15 ($2.47), compared to its HK$8.44 trading price.
“Given that expectations of sluggish consumer confidence are already reflected in the current share price and trading at five stars, this could suggest that shares may have bottomed out already. Shares are currently trading at a 0.55x price/fair value estimate ratio, and current dividend yield is 5.2%,” add analysts.
Tables: Morningstar Equity Research
Photos: Bloomberg
