Jack Phang, CFA (left), is a remisier at Maybank Kim Eng Securities. This article was first published in his blog, and is reproduced with permission.DUKANG DISTILLERS reported a very disappointing result, right after it issued a profit warning on 2QFY14 report.
Revenue in 2QFY14 dropped a significant 45% y-o-y, with only RMB402.8M revenue recorded.
The product mix has changed with Luoyang Dukang regular brand becoming more significant and this eroded the gross profit margin.
Worse, surging A&P expenses which amounted to more than 20% of revenue had caused the net profit to be reduced to RMB10M in this quarter.
Dukang billboard at Zhengzhou. File photoAccording to the management, this is not the time for the company to cut A&P expenses as well as working capital needs. Instead, the company would increase its capex (you can see that the inventories have increased) in preparation for fierce competition among peers. The baijiu industry currently is the midst of intense competition (mainly due to the government's curb on luxurious consumption), as many companies reduce their average selling prices to gain market share.
While Dukang is still in a net cash position, no doubt the company would not distribute dividends to shareholders as it has to conserve cash for capex and opex requirements.
The cash flow from operating activities turned negative this year, as the company increased inventories (mainly grain alcohol).
Company's growth strategies remain:
* Enhance brand value by participating in promoting baijiu, especially the Dukang premium brand
* Strengthen distribution networks as none of the top 5 distributors accounts for more than 10% of sales.
However, I noticed that the number of distributors was lower compared to FY2013 and I believe that is mainly due to the curb by the Chinese government on luxury spending in banquets.
* Improve capacity and utilization. The utilization rate was 105% for 2QFY14.
Looking ahead: |
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