Dukang Distillers

Dukang Distillers: Baijiu distributor Dukang Distillers cautioned that its upcoming 2QFY14 revenue and earnings would be significantly lower due to a fall in average selling prices and sales volumes for Luoyang Dukang and Siwu products, as well as higher advertising and promotional expenses. No surprise on the profit warning given that the austerity measures, which started across the nation more than a year ago, have hit the major liquor makers harder than most, in the wake of government curbs on lavish spending on gifts and banquets by public officials. As the industry undergoes a period of adjustment and consolidation, we expect margins to continue to deteriorate on the back of a shift in mix toward the lower premium products, as well as a potential price competition. Counter is down 12% after the profit warning. At the current price of $0.23, Dukang trades at 4.1x ex-cash annualized 1QFY14 P/E.