01 September 2014

Dukang FY14 Result Summary - September 2014

Dukang released its unaudited fully year 2014 report. The sales dropped by 40% to RMB 1,451 Million from RMB 2,406 Million a year ago. Net Profit dropped by 89% to RMB 44 Million from RMB 390 Million a year ago. It is mainly due to the decrease in gross profit margin to 36% from 41% previous year as well as the decrease in revenue. The company highlighted that decrease in revenue from both Luoyang Dukang and Siwu operations, as a result of China’s current austerity measures on luxury gifts and spending

Balance Sheet wise, Dukang registered an increase of almost 100% in inventory level to RMB 689 Million from RMB 343 Million, mainly due to the bulk purchase of good quality grain alcohol at a competitive price. The Cash level dropped to RMB 392 Million from RMB 758 Million a year ago. Nonetheless, the group maintain a healthy debt level by having total liabilities to total asset ratio of around 21%. The total equity to shareholders increased by about 2% RMB 1,999 Million. 


Cash flow wise, Dukang recorded a negative Free Cash Flow of RMB 472 Million mainly due to the negative operating cash flow (increase in inventories) and CAPEX of RMB 152 Million. 

ROE for the company is only in low single digit level, with estimated PE ratio of 16X and PB ratio of 0.35X.

On Comment on it's outlook:

"China’s ongoing anti-corruption campaign continues to affect its baijiu market. With the government’s clampdown on luxury gifting, lavish banquets and receptions, demand for premium baijiu decreased tremendously. As a result, many baijiu manufacturers underwent product reshuffling to accommodate their supply to a different target group, China’s grass-roots market. Lower demand for baijiu coupled with a product shift has caused a decrease in average selling price across the industry, resulting in lower profit margins. After a year of restructuring, price and sales adjustment, some prominent first-tier baijiu brands are reporting a slight recovery as the industry downturn slowly flattens out.

Despite the structural shift from premium to non-premium baijiu and the lower margins, the Group believes the demand for baijiu is largely intact. In order to sustain the Dukang brand name in the market and gain market share, the Group intends to continue with its marketing initiatives prudently going forward. 
"

My Notes

It seems that the company intensified its marketing efforts in getting larger shares from the market, and tried to reduce the cost by bulk purchase of inventories. I believe that the company may slower down as the cash flow may not be able to do so unless it raise the funds via borrowings / shares placement. 

The near term outlook for Baijiu especially luxury Baijiu market may not be better so soon, as company is now targeting mass market which contributes to lower gross profit margin. With PE of 16X and low growth prospect, I think it is a bit high valuation for company. But if you look at PB ratio of lower than 0.5X, you may be able to think that as long as the company can recover from current situation ( government’s clampdown on luxury gifting ) by expanding the network and reach more end customers, I think it is still a good business, despite the fact that the gross profit margin is still in a healthy 30% + level. 

Nonetheless, I will just wait for better outlook for Baijiu sector first before I will re-look on this counter again. 

Some of the screen capture from my spreadsheet:








No comments:

Post a Comment

Related Posts Plugin for WordPress, Blogger...