Dukang Distillers

Dukang Distillers: Key interviews with mgt. Mgt note that there is definitely room to grow net margins from the current 12% to the national average of 15%. Nonetheless, at the stage of high advertising expenditure to step up brand awareness of Dukang brand of products in the PRC as grp now ready to go nation wide. Grp will gradually step up Luoyang Dukang's advertising and promotion (A&P) going forward and budgeting an A&P expense ratio of about 10% to 15% for Luoyang Dukang. Group A&P expense is expected to be 10% to 12%. Think that net margins will be flat for now, but will gradually increase when advertising expenditure is moderated with strong sales growth. To move sales, 3 factors must be in place. Firstly, must have visibility in hotels, restaurants and shops. Secondly, distributors must be willing to sell it, and this is dependent on product quality, pricing and credit terms. Thirdly, must give consumers a good reason to buy Baijiu. E.g Grp can encourage corporates to use Dukang Baijiu as an employee award. Also make it conveniently available to consumers by offering both retail and online purchases. During 2Q (Oct-Dec) and 3Q (Jan-Mar), Baijiu sells especially well because of the cold winter and festivals like CNY.