Dynasty Fine Wines distribution channel reform unlikely to be completed this year

Delay may drag 4Q12 growth sales, says CIMB.

At Dynasty’s 3Q12 update conference call, the management said the yoy declines in volume and margins have narrowed in 3Q12 vs. 1H12.

Even so, CIMB believes the distribution channel reform is unlikely to be completed by year-end, given the slower progress in Eastern China.

"We expect this delay to be a drag on Dynasty’s sales volume growth in its 4Q12 peak season, and lower our FY12-14 earnings forecasts by 9-16% We believe execution risk remains an overhang in the short term," said CIMB analyst Lei Yang.

Here's more from CIMB:

Management said the distribution channel reform is still going on, but the progress in the Eastern and Southern China markets (i.e. Shanghai, Ningbo, Wenzhou, Guangdong, etc.) has been slower than anticipated.

The total number of distributors has increased to ~400 from 310 in July, and 210 at end-FY11. Sales contributions by geographical region has changed to around 20% from each of the South/East/North/ Central China markets in 9M12 from 30-40% of sales from Eastern China previously. Sales promotions before the October Golden Week drove up the distribution expenses ratio by 1-2%pt mom in September.

Dynasty currently has about six months of grape juice inventory, with an average price that is 3% lower than that of last year.

We expect the completion of channel reform to be delayed to 2Q13. This will drag down Dynasty’s sales volume growth in its 4Q12 peak season. In the longer term, the reform should drive up Dynasty’s sales, as the flattened distribution channel structure will improve its bargaining position with distributors. National
wine output grew 15.9% yoy in September and 18.3% yoy in 9M12.