DUKANG: 1Q2013 net profit surged 75% to Rmb 63.9m

CHINA’S SLOWDOWN has hit the profits of many S-chips, but Dukang Distillers is an exception. Net profit of the distiller of Baijiu (Chinese heavy liquor) surged a whopping 74.7% year-on-year to Rmb 63.9 million in 1Q2013.

Dukang is the leading brand in Henan, which had a Baijiu market size of Rmb 35 billion or about 10% of China’s Baijiu market

1Q2013 was the first quarter of the third year it is offering Dukang Baijiu and revenue shot up 67.6% at Rmb 406.5 million, boosted by the contribution from the Luoyang Dukang brands.

Luoyang Dukang accounted for 74.2% of group revenue in 1Q2013, compared with 61.4% in FY2012.

Its star performer is the Luoyang Dukang premium series, the average selling price of which was up 23.1% year-on-year at Rmb 188.50 per kilogram.

”Baijiu demand is usually at a seasonal lull during the warm summer months from July to September.

"We expect sales in the next two quarters to escalate because demand is higher during the cold winter season and during festivals such as the Chinese New Year,” said CEO Zhou Tao during an investor telecon on Monday.

Net profit margin is up 0.6-percentage point at 15.7%.

For more info, read press release here.

Below is a summary of questions raised at telecon and the replies made by Mr Zhou and financial controller Raymond Ho.

Q: How will the recent government initiatives to curb use of alcohol during networking events affect you?

These initiatives have been around for 3 years. Despite this, Baijiu sales have surged in the past 3 years. The discouragement of alcohol consumption in corporate banquets has greater impact on high-end brands like Maotai, which can cost more than Rmb 1,500 per bottle. I believe the curbs have led to an increased demand for more affordable alternatives like Dukang.

Q: Why were 4Q2012 sales (Rmb 453.4 million) higher than 1Q2013 (Rmb 406.5 million)?

During 1Q, Baijiu sales are seasonally lower because Jul to Sep are warm summer months. On the other hand, several national trade exhibitions take place during 4Q months of Apr to Jun. This includes our Dukang National Trade Fair. It is at such exhibitions that distributors are recruited, and sales surge.

Jiuzu Dukang contributed 18.4% to group sales in 1Q2013

Q: Why is quarter-on-quarter net profit margin up so much (1Q2013: 15.7%, 4Q2012: 5.4%)?

1Q2013 margin is higher as our iconic premium product series, Jiuzu Dukang, which was launched in mid 2011 is gaining traction and contributed 18.4% of total Group sales.

During 4Q2012, we had higher advertising and promotion expense as trade exhibitions are held during Apr to Jun and we want to boost sales during the exhibitions.

Q: Why are your inventory numbers down when you are stocking up on grain alcohol?

In 1Q2013, revenue was up sharply and this resulted in a draw down on our grain alcohol inventory. We are increasing capacity by 700 fermentation pools and expect inventories to be replenished. Also, we expect the sales growth to stabilize.

Q: You are spending Rmb 200 million to expand capacity by 30% (3,000 tons of grain alcohol). FY2012 net profit was Rmb 218 million and your cash reserve is Rmb 527 million. What other capex is there that stops you from paying dividends?

Other than spending Rmb 200 million to Rmb 300 million to add 700 fermentation pools over the next one to two years, we also need to prepare Rmb 150 million for three distilling plants. Secondly, we are at a stage of huge advertising and promotion expense as we try to create a national brand.


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