IT IS apparent that Dukang Distillers is a laggard in the recent market rally. Dukang’s price had suffered a setback in November.
This was after the official Xinhua news agency cited findings by Hunan provincial authorities that excessive plasticizers (i.e. toxic chemicals which can induce early female puberty and cause damage to men's reproductive health if consumed over a prolonged period) were found in Jiugui Liquor products.
In addition, there was continuous strong anti-corruption rhetoric from the new Chinese leaders which might reduce demand for expensive baijiu.
Furthermore, according to an article published in the PLA Daily (i.e. the official army newspaper) last month, expensive liquor has been banned in military and government receptions. All of these developments contributed to the weakness in the share price performance of baijiu players, which undoubtedly also affected Dukang.
1. Dukang’s end customers are not the military
Thus the ban on expensive liquor at military and government events does not have a direct and significant impact. Nevertheless, there may be indirect effects, such as the possibility that other baijiu players may start to divert some of their attention from military and government to sectors such as hospitality and retail.
2. Dukang’s products are not as high end as Moutai or Wuliangye
Dukang products are priced around RMB300-1,000 with 1,000 being their top end product. (Moutai’s products are typically more than RMB1,000).
During a teleconference with analysts in Nov 2012, management said government curbs may arguably lead to an increased demand for more affordable alternatives such as Dukang’s products.
(Readers can refer to Nextinsight’s takeaways from Dukang’s teleconference with analysts.
3. Results – 2Q & 3Q are key
According to 1QFY13 results announcement, management remained upbeat on prospects and believe the upcoming 2Q and 3Q should be good due to festive seasons. It would be interesting to see the management’s outlook in the coming quarters in view of the recent industry headwinds.
2. Cessation of substantial shareholders over the past three months
As there is limited information available, it is difficult to judge the impact on such action but there may be a risk that these shareholders may sell the shares on the open market.
3. Slumping prices for Moutai and Wuliangye products
This might be due to distributors who had stocked up Moutai and Wuliangye products because they had expected them to appreciate in price as the festive seasons approach.
However, the government curbs affected demand and the distributors had to sell at cheaper prices, or else they may suffer losses on their inventories. Nevertheless, such a decrease in price may narrow the difference between Moutai, Wuliangye and Dukang’s highest end products which may ultimately affect Dukang.
4. Usual S-chip risks
For Dukang, its average 30D & 100D volume amount to around 4.6m and 3.6m of shares, respectively. Thus, it is not exactly an illiquid stock. The recent price performance has been lackluster but it is resting on a strong cluster of supports of around 0.305 – 0.315.
Valuations trading at a steep discount vs peers
According to Bloomberg, Dukang trades at a historical PE of around 5.1x vis-à-vis the industry average of around 17.4x. In it latest 1QFY13 results, Dukang’s NAV per share was around $0.40 vs the market price of $0.310 last Friday.
In a nutshell, Dukang’s upcoming 2Q and its outlook in the quarters ahead may prove to be a rerating factor if they continue to deliver.
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