Dukang Distillers Holdings

in line with my investing hobby of collecting old whiskies I'm also investing in this chinese bai jiu distiller dukang

I know know ... this is S-Chip but the stock is now looking attractive after recent month of may severe beating

As people in China start of have more disposable income that's something to toast about, and if a recession comes .. well .. the most common antidote for misery is also alcohol so sales of luxuries like liquor should grow and grow

http://info.sgx.com/webcoranncatth.nsf/V...D007DFA5E/$file/DKHL-3Q2012-Presentation.pdf?openelement

Li Wei, Executive Chairman of Synear holdings, is speculated to be involved in Dukang businesses and listing in S'pore and Taiwan.

http://finance.qq.com/a/20120426/009045.htm
http://trans.wenweipo.com/gb/hn.wenweipo...o=lastpost

Me see this kind of chairman, I will run far far away from anything that remotely links to him.

open to all comments

for reading

buffett: china may already have it's coke

Dukang ties up with Lotte Chilsung Beverage Corp of South Korea

Dukang deserves better valuation

Dukang considering dividends share buyback after shock fall

Dukang hosts visit for investors

even its premium Dukang at most just a mid-end liquor in China.


Maotai is selling at around 1,500 RMB/Kg.

these investments should be long term.

Personally for investment I would prefer a tipple that the man in the street drinks like for example tiger beer or like chang(thailand) because in any population majority are the commoners and that in china will amount to several hundred million of such people but I guess dukang has to be the next best thing.

WSJ: Diageo Bets on China’s Homegrown Baijiu

the regular liquor has huge competitions. There are hundreds of common baijiu brands in China. a lot of them are much cheaper than Dukang. e.g. below 10 RMB/kg, or even around 2 - 3 RMB/Kg

Baijiu consumption in China rises by 30% annually. reaching RMB 293b in the first 10 months of 2011, and yielding a combined industry's net profit of RMB 43b (or 14% return on sales revenue).
Dukang Distillers' FY 2011 revenue of RMB1.4b was small. Even in its home province of Henean where overall baijiu sales revenue is RMB 30b, the company is also insignificant.
The company wants "Dukang" to become the top-tier brand in Henan by 2013, and in the entire China by 2015.
Are these targets over-ambitious?

However, the company announcement on June 11 seems to indicate that despite lagging behind the leading provincial brand of "Songhe", "Dukang" is being endorsed:
"The event was also attended by Mr. Lu Zhan Gong ("卢展工"), Henan Party Chief, and other municipal leaders. Mr Lu affirmed Dukang baijiu as one of the three specialties of Henan and endorsed Dukang as his baijiu of choice."
Does the endorsement of "Dukang" suggest that it has the potential of achieving greater height?.

Baijiu producers set aside their grain alcohol for aging to be sold for higher prices in subsequent years. Do the stagnating inventories (around RMB 290m) indicate limited future profit growth?

Another point is that the company seems to be betting on "Dukang" and neglecting "Siwu". Between 1 Jul 2011 and 31 Mar 2012, sales of Dukang rose by 50% over the earlier corresponding period, whereas sales of "Siwu" declined by 15%.

If the company management is honest and I think they should be otherwise they could have just ignored investors why bother with so many announcements interviews and hosting tours for investors. I think doing this shows some sincerity.

Also there's the tie up with south-korean company, wouldn't you think the koreans with their reputations at stake would be more cautious and wary and already considered such matters before tie up?

If that and the investment can really grow by 30% a year profit, even 20% will still be good. No need to be known in the whole of china within the top 10 companies in Henan province market can already. The population size in Henan Province is around 90 million is almost like the size of whole of Philippines.

I wonder what is their market share

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Quote: Baijiu producers set aside their grain alcohol for aging to be sold for higher prices in subsequent years. Do the stagnating inventories (around RMB 290m) indicate limited future profit growth?

just to add is not uncommon for liquor distillers to age their product. Whisky distillers are known to age their product in sherry barrels for upto 50 years.

If you tried thai whiskey it is cheap very cheap very plentiful I tried it some years back at a pub in thailand a 2 pack glass shot only cost S$3 but it is also unaged, any unaged liquor is really hard stuff when drinking it down it's really rough, burns and gives a sore throat like anything and taste like drinking paint thinner.

What aging does is it mellows and takes away that rough edge it also makes the end product palatable and imparts some of the properties from the wooden barrel to produce distinct flavors and aromas, in America before bourbon whiskey is aged, they actually burn the inside of the wooden sherry barrel to char it up slightly so that when their bourbon is being aged it gets imparted the dark amber color and has a nice burnt flavor and aroma to it. Jack Daniels the bourbon producer have around 300,000 barrels of bourbon stashed away for aging in their storage.

but the process of aging also creates "angel share" over long periods of time while the alcohol improves with each year the contents in the barrel will also slowly disappear as though angels watching over these barrels will partake of their share

That's why usually around 10th or 12th year they will start bottling it but they usually will set aside a number of barrels to continue aging to produce high premium quality product that will fetch high price later. By the 30th year the contents will be down to maybe less than a third but it will be very fine stuff and cost thousands of dollars each bottle.

So if dukang sets aside to age their product in grain pools I understand what they are doing, they have a range of products some are for their regular customers commoners stuff then they are also producing something for more discerning clientele who are prepared to pay well for premium quality.

Sgd
It is common knowledge that older wine fetches better price. An article in "China Wine News" states that stored grain alcohol gains 25% in value annually.
Baijiu producers derive the bulk of their profits from premium series. For "Dukang", ASP of its premium series was RMB 190 per kg, against RMB34 for regular ones. GPMs were 55% and 31% for premium and regular respectively. The higher ASP resulted in premium series raking in 45% of revenue on 13% of sales volume.
Can the company grow its profit when inventories have stagnated? It may add new facilities. But according to the company's annual report, new fermentation pools cannot produce quality baijiu soon enough because the microbial community and fragrant particles take years to build up. Are companies tempted to sell their products prematurely for immediate higher profits at the expense of future ones.

I am puzzled by the 15% turnover decline in "Siwu" against the 30% growth nation-wide. Based on your experience, is it rational to allow a brand that accounted for 46% of FY 11 turnover to wither?

"Dukang" brand name may be valuable because of its rich history. Folklore (or historical accounts) has it that Mr Du Kang, who lived two thousand years ago, was the one who chanced upon the wine produced from fermented rice. 曹操, the well-known character during the Three-Kingdom Era, wrote that only "Dukang" wine could sooth his sorrow----何以解忧，唯有杜康.
Debate on whether the 杜康 referred to by 曹操 is the specific wine brewed according to Mr Du Kang's formulation or wine in general is still raging. There is also question as to whether the company is now brewing "Dukang" in accordance to Mr Du Kang's formulation.
Nevertheless, the "Dukang" brand name has taken hold. When they met, Tanaka, the former Japanese PM, asked Chou En Lai for "Dukang". It has been said that Japanese revere Mr Du Kang for he also brewed sake that was brought to Japan. The MOU between the company and Taiwan Tobacco and Liquor Corporation (TTL) on the proposed production of saké by TTL for sale in the PRC under the "Dukang" brand name seems to corroborate this.

I am not sure whether Dukang Distillers has enough inventories of premium series to sustain its strong profit growth. If future growth is on a lower pace, expectations must be managed.

(14-06-2012, 10:12 AM)portuser Wrote: I am puzzled by the 15% turnover decline in "Siwu" against the 30% growth nation-wide. Based on your experience, is it rational to allow a brand that accounted for 46% of FY 11 turnover to wither?

Based on the sgx link to the corporate presentation around page 9 it says Siwu spirit was acquired in 2005-2006. Meaning was the product originally from dukang? If not then was Siwu competition that they bought out?

Dukang Presentation

Also based on this other Link around page 2.

it says

Sales of the products under Luoyang Dukang regular series, representing 36.4% of the Group’s sales, improved by 21.0% yoy to RMB215.2 million for 3Q2012. This was achieved on the back of a 31.4% increase in sales volume and an 8.0% decrease in ASP.

Sales of the products under premium and regular series of Siwu brand were down by 10.4% to RMB58.6 million and 6.7% to RMB144.2 million, respectively, as the Group channeled more efforts towards the promotion of the Dukang brand.

buying out the competition? taking over their production facilities and trumping up your market share in the process. And I'm guessing here on their ambitious corporate goals .. hmm ... aggressive management?