Dukang Distillers Holdings

Dukang Distillers Holdings: FY14 net profit crashed 89% y/y to Rmb84.8m, on revenue of Rmb1,450.9m (-40%), weighed by lower sales from both Luoyang Dukang (-32%) and Siwu (-66%) operations, attributed to the clamp down on luxury gift gifting and lavish spending in China. Gross margin decreased 4.8 ppt from 40.9% to 36.1% on an overall decline for products. Despite a slight increase in sales volume for Luoyang Dukang’s Regular series, overall average selling prices declined 30% to Rmb39.1/kg, as a result of the shift in market focus from high-spending government officials to general consumers. Dukang's once-healthy balance sheet is almost exhausted (albeit still net cash), with the previous net cash position of Rmb673.6m ($0.17/share) in FY13, now at Rmb190.8m ($0.05/share). With the austerity measures, Dukang have shifted production mix and sales focus towards the non-premium segment to cater to China’s growing grass-roots market. Management still remains optimistic that baijiu drinking is deeply rooted in the Chinese culture and will have a sustainable market demand. At $0.182, Dukang is valued at a hefty 16.2x P/E and 3.6x P/B. We reckon investors may find better value elsewhere, in another industry not within a structural downturn, or a potential consolidation.