China Baijiu: Leading Premium Brands Should See Limited Hit From Consumption Tax Reform

China is set to start a new round of consumption tax reform, which aims to transform centralized taxation to a hybrid tax system shared by central and local governments. The reform may also involve broadening the tax base and shifting collection points to wholesale and retail markets from production lines. Although details about the reform remains scant in the near term, we think the impact on baijiu distillers should be limited. In particular, we believe leading premium baijiu brands are better positioned in the long term as their unparalleled brand strength and premium product quality should translate into strong pricing power, allowing them to mitigate cost inflation through price hikes. As such, Wuliangye and Laojiao remain our preferred picks in China‘s baijiu sector.