Dukang Distillers

News
• 2Q2012 revenue up 22.0% yoy to RMB540.0 million; ASP and volume boosted by
Luoyang Dukang’s strong branding and an extensive distribution network
• Net profit up 55.2% yoy to RMB94.4 million on further margin improvements

Outlook
"We delivered record sales volume, revenue and net profit for the past quarter," said Mr. Zhou Tao (“周涛”), CEO of Dukang Distillers. "In short, this quarter’s results bear testament to the strength of Dukang’s brand, the Group’s marketing creativity and its extensive distribution network.” China’s bajiu industry has maintained the growth momentum experienced during the last five years with the industrial production volume witnessing a 30.7% 1 yoy growth for the calendar year ended 31 December 2011. The Group’s 10.7% yoy growth of sales volume in 1H2012 lagged behind industry due to its limited production capacity of grain alcohol for Luoyang Dukang.  In order to capture the growing demand for Baijiu, the Group recently added another 50% of capacity with the revival of 1,470 unused fermentation pools for the production of Luoyang Dukang grain alcohol.
In 2Q2012, its 2,968 fermentation pools with an overall production capacity of 7,610 tonnes of grain alcohol were almost fully utilised.  After a 60‐day fermentation period, the grain alcohol is aged between 7 to 24 months before it is ready for sale.

Analysis
With the increase in net profits and strong branding, this company is able to minimise its reliance on bank loans. With the full utilisation of the fermentation pools, they are also able to further increase their profits for the 3rd quarter. However, they are likely not to payout dividends within these few years.

Dividend Yield
No dividends. I emailed their investment relations officer, Yit Sung.He wrote me a detailed reply.

“We have a dividend policy to distribute 5%- 20% of the distributable earnings for the year as cash dividend since 2011, this is required by TWSE when we list our TDRs.

According to the CEO, for 2nd tier baijiu enterprise like us in growing stage, our annual growth will be more than 30% for several years consecutively. So it would be wise to reinvest the cash in a compounding machine, where we believe the growth in business will bring value to investors in terms of more premium share price. The board has discussed this matter before as well, like giving out S$0.01 dividend. With approx. 800m shares, the company will need to pay S$8m (~RMB40m). And with RMB40m, we can actually dig 1000 new fermentation pools to increase our grain alcohol production cap, which is our plan in 2012 (We plan to dig 1500 new fermentation pools). This does not include the cost for land, fermentation pool shelter and other peripherals like excavators and distillation lines.

As you can see, paying out dividend now will actually set us back on our expansion plan. If we were to payout now, we will need to raise funds elsewhere, which may dilute the interest of existing shareholders. Many investors don't understand this and I am glad to that I have the opportunity to explain to you.

Nonetheless, we understand where the investors are coming from and we do hear your voice. The board will be reviewing this issue during the approaching board's meeting together with other agenda like share buyback scheme.

I will be in Zhengzhou this May, will check on few concerns from investors and do some channel checks. Feel free to let me know if you have any concern that I can bring up to the management. Will keep you posted.”

PE Ratio
13

Net Asset Value
The price of $0.25 entitles you 144.31% of their assets


About DuKang Distillers (From SGX)
The Company was incorporated in Singapore on 7 July 1976. On 26 December 2002 it was Dukang Distillers Holdings Limited (previously Trump Dragon Distillers Holdings Limited) is a leading producer baijiu in Henan Province, the PRC. The Group carries a broad range of baijiu products that are sold and marketed under two distinct brands, ‘Luoyang Dukang’ (“杜康”) and ‘Siwu’ (“四五”). Named after the forefather of baijiu and supported by a history of over two thousand years, ‘Dukang’ (“杜康”) is a well‐established national brand with a rich cultural heritage that focuses on the mid to high‐end baijiu market in the PRC.    
With its extensive range of affordably priced products, the Group’s ‘Siwu’ (“四五”) brand targets the mass to mid‐end baijiu market and has an established consumer base in Henan Province.   
The Group’s products are sold through distributors to hospitality establishments, supermarkets and specialty stores selling tobacco and alcohol products in the PRC. With the acquisition of Luoyang Dukang complete in May 2010, the Group has significantly increased its production capacity, and is primed to strengthen its market position and competitive edge in baijiu industry within Henan Province as well as across the PRC. The Group has been listed on the SGX Mainboard since September 2008 and on the Taiwan Stock
Exchange via Taiwan Depository Receipts since March 2011.




Published on 06 May 2012