Shui Jing Fang expects revenue to decrease by 40% and net profit to drop by 71%

Recently, global spirits giant Diageo announced its mid-year results for fiscal 2026: organic net sales declined 2.8% year-over-year to $10.46 billion, with organic operating profit also down 2.8%, highlighting weak core profitability indicators. Even more shocking to the market, Diageo also announced a cut of over 50% in its interim dividend and significantly lowered its full-year guidance, expecting organic net sales to decrease by 2%-3%, with operating profit expected to be flat or only low single-digit growth.

This performance setback is primarily due to collective pressure in Diageo’s key global markets. North America saw a 6.8% decline in organic net sales, with core tequila brands like Don Julio and Casamigos experiencing over 20% sales drops, directly reflecting the dual pressures of consumer downgrade and intensified industry competition in the U.S. market. The Greater China region performed even worse, with organic net sales plunging 42.3%, and Chinese liquor sales falling by 50.4%. The earnings report explicitly states that excluding China’s liquor business, the group’s organic sales could have achieved a 2% positive growth—meaning Watering Well’s collapse in performance directly dragged down Diageo’s global results.

Meanwhile, rumors circulated that Diageo plans to sell Watering Well. During the fiscal 2026 mid-year earnings call, management responded clearly to the market speculation about “selling Watering Well.” Diageo’s CFO, Nik Jhangiani, stated that the rumors about selling Watering Well (600779.SH) are purely market speculation.

However, Diageo also indicated, “We will not sell brands below fair value. If a third party makes us an irresistible offer to acquire assets outside our strategic plan, as a rational company, we will certainly consider and engage.”

It’s worth noting that shortly before the “Diageo to sell Watering Well” rumors surfaced, Watering Well released its 2025 earnings forecast: the company expects net profit attributable to the parent to be about 392 million yuan, a decrease of approximately 949 million yuan from the previous year, down 71%; revenue is projected at about 3.038 billion yuan, down about 2.179 billion yuan, a 42% decline. The forecast also estimates that net profit excluding non-recurring gains and losses will be about 381 million yuan.

This data indicates that Watering Well’s revenue has fallen back to around 2020 levels, with net profit dropping to the lowest since 2018. The ongoing performance volatility behind Watering Well is not merely a short-term industry cycle impact.

From slowing growth to sharp decline, Watering Well’s profitability resilience continues to weaken

In fact, Watering Well’s performance has shown signs of stagnation. According to its annual reports from previous years, from 2021 to 2024, the company achieved revenues of 4.632 billion, 4.673 billion, 4.953 billion, and 5.217 billion yuan, with growth rates of 54.10%, 0.88%, 6.0%, and 5.33%; net profits attributable to shareholders were 1.199 billion, 1.216 billion, 1.269 billion, and 1.341 billion yuan, with growth rates of 63.96%, 1.40%, 4.36%, and 5.68%. It’s clear from the data that since 2022, although revenue and net profit have maintained positive growth, the growth rates have been modest.

In 2025, Watering Well experienced a “halving” performance, marking its worst in recent years. Breaking down quarterly, according to the third-quarter report, in the first three quarters of 2025, the company achieved revenue of 2.348 billion yuan, down 38.01% year-over-year; net profit was 326 million yuan, down 71.02%; and net profit after deducting non-recurring gains and losses was about 318 million yuan, down 71.57%. Notably, in the second quarter of 2025, the company posted a net loss of 85 million yuan for the quarter, its first quarterly loss.

Behind the decline is also a simultaneous pressure on cash flow. The third-quarter report of 2025 shows that the net cash flow from operating activities was -866.7 million yuan, a significant year-over-year decrease.

In its 2025 earnings forecast, Watering Well explained that the deep adjustment phase in the liquor industry is driven by macroeconomic cycles, industry restructuring, and policy changes, with slow recovery in traditional business banquets and high overall industry inventory levels.

Looking at inventory levels, Watering Well’s inventory has been rising for several years, with growth rates consistently exceeding revenue growth. According to annual financial reports, at the end of 2021, inventory was 2.197 billion yuan, up 16.9%; at the end of 2022, it increased to 2.443 billion yuan, up 11.19%; at the end of 2023, it reached 2.452 billion yuan, up 3.77%; and at the end of 2024, it further rose to 3.216 billion yuan, up 31.13%. As of September 30, 2025, inventory was 3.798 billion yuan, up 18.10% year-over-year, roughly doubling from the beginning of 2021.

In physical volume, supply-demand imbalance has further intensified inventory pressure. The 2024 annual report shows that Watering Well’s wine inventory at year-end was 71,820.41 kiloliters, a 23.83% increase from 2023’s 57,999.61 kiloliters; during the same period, production volume was 13,237.58 kiloliters, up 14.78%, while sales volume was only 11,961.11 kiloliters, up 6.46%. Production growth far outpaced sales, indicating a clear disconnect between capacity release and market demand, with excess production further adding to inventory.

The high inventory levels have led to a continuous deterioration in inventory turnover efficiency, with the turnover period significantly lengthening. As of the third quarter of 2025, inventory turnover days increased to 2,034.66 days, up 80.71% year-over-year, meaning the current inventory clearance cycle is close to 5.6 years—far above the industry’s reasonable 3-4 years, and even exceeding the turnover levels of leading peers like Moutai, which maintains inventory turnover days under 1,000. Media reports, including China Securities Journal, have noted that Watering Well’s prolonged inventory clearance cycle has caused some high-end products to become “less valuable with age,” further squeezing profit margins.

This inventory pressure has ultimately spread to distribution channels, causing imbalance in the channel ecosystem. According to Economic Reference News, high channel inventory has led to price inversion for some products, with terminal prices below factory prices, severely squeezing distributor margins, reducing cooperation stability, and causing some regional distributors to withdraw. To address price inversion and inventory pressure, the company adopted measures such as inventory control and halting shipments in mid-2025, attempting to stabilize prices, but these measures further depressed short-term revenue, creating a dilemma of “controlling inventory to maintain prices—revenue declines—inventory remains high.”

Diageo’s control over Watering Well: personnel reshuffle

Diageo’s stake in Watering Well was not achieved overnight but through a gradual, over-ten-year capital operation, with each key milestone documented through company announcements and regulatory approvals. Its evolving ownership structure directly influences Watering Well’s governance.

In December 2006, Diageo first invested in Watering Well by acquiring a 43% stake in Quingxing Group for 570 million yuan, indirectly holding 16.87% of Watering Well, marking its first large-scale foreign investment in Chinese liquor. In August 2008, Diageo increased its stake in Quingxing to 49%, becoming a co-major shareholder alongside original shareholders, further consolidating its influence.

In June 2011, with approval from the Ministry of Commerce (Shangzi Pi [2011] No. 1008), Diageo increased its stake in Quingxing by 4%, reaching 53%, becoming the absolute controlling shareholder of Quingxing and indirectly controlling Watering Well—this was China’s first foreign-controlled liquor listing company, attracting industry-wide attention. In July 2013, with approval from Sichuan’s Commerce Department, Diageo acquired the remaining 47% of Quingxing for 233 million pounds (about 2.2 billion yuan), achieving 100% control of Quingxing and indirectly holding 39.71% of Watering Well, making it a wholly foreign-owned listed liquor company.

By 2018, Diageo further increased its holdings through secondary market purchases and agreements, reaching about 60% ownership by year-end, securing absolute control. As of September 30, 2025, Diageo held approximately 63% of Watering Well’s shares, firmly maintaining control.

With increased ownership, Diageo gradually introduced its international corporate governance, financial risk management, and brand management philosophies into Watering Well. The proportion of foreign executives on the board and management increased, and decision-making mechanisms aligned more closely with international spirits groups. However, this “internationalization” clashed with the local attributes and consumer logic of the Chinese liquor industry, laying the groundwork for subsequent personnel upheavals and strategic shifts.

Personnel changes are the most direct reflection of governance turbulence at Watering Well. Since 2020, key positions such as general manager and group chairman have seen frequent turnover, each change documented through company announcements and business registration records. The high frequency of personnel reshuffles has led to a lack of continuity in strategic execution, worsening operational difficulties.

Reviewing past announcements, since 2020, the general manager position has changed five times (including acting managers), with an average tenure of less than one year, making Watering Well one of the most frequently changing companies in the liquor industry. In 2020, Fan Xiangfu stepped down, replaced by Zhu Zhenhao; in 2021, Zhu was replaced by Wei Yongbiao as acting general manager; in 2022, Wei officially took the role but resigned in less than two years; in July 2024, the company announced Hu Tingzhou as general manager, with a pre-tax salary of 6.23 million yuan in 2024; by the end of 2025, Hu’s tenure was less than a year, illustrating management instability.

Beyond the general manager, the chairman and legal representative of Watering Well Group have also seen frequent changes. In October 2024, Cristina Samin Suner was appointed chairman and legal representative; however, after only nine months, in July 2025, the company announced her resignation, succeeded by SUDHINDRA SHIVNEGERE RAJARAO—less than a year between changes. Additionally, in December 2025, Watering Well appointed Shannon Job as an independent director, further internationalizing the board, just three months after the previous board member change.

The frequent personnel shifts reflect conflicts between foreign and domestic management philosophies and strategic indecision. First Financial reports that internal staff have indicated that these rapid personnel changes cause frequent management process adjustments, reduce staff stability, lead to loss of core teams, and impair operational efficiency and market responsiveness. This turbulence is essentially Diageo’s attempt to balance “international management” with “local adaptation,” but the pace of adjustments has not synchronized with the industry’s development cycle, ultimately reducing governance efficiency.

Bai Wenxi, chief economist of China Capital Alliance, also noted that frequent leadership changes can cause strategic discontinuity, erode channel confidence, fragment team execution, and lead to internal resource idling. During the deep adjustment period of Chinese liquor, stability and long-term vision are crucial. If management continues to rotate like a revolving door, Watering Well may find it difficult to clear inventory and risk slipping further from the high-end segment.