Dukang Distillers Holdings

[Stockerman]

Fully Agreed.

Does Dukang pay any dividends at all, after making good profits for many years?

this is what I heard from my interactions with insiders in the various industries...

In Gold Industries, they increase their GPM (gross profit margin) by mixing some other "metals" in the gold.
In the Oil Bunkering business, they increase their GPM by mixing in some other much lower grade "OIL".
I am not sure what do they do in the Chinese Wine industry in CHINA?
I leave it to your imagination....

Dukang launched a Baijiu Cultural World Tour
...
Sounds like sleek marketing, but the second video indicated that it is a very small scale event. There is also no information on which city is the next stop after Singapore. Couldn't find any information on weibo or other chinese websites.

Good grief. Is this a bad joke? This is so obviously cooked up for investors in the hope of driving up the share price. It's not aimed at promoting the brand at all. If you want to raise customer awareness you book a shopping centre podium e.g. Marina Square, Raffles City, Centrepoint, Ion Orchard etc. Not a private room for 50 people (which apparently counts as "overwhelming response" in PR-speak) in some fancy restaurant in an expensive hotel (Swissotel in this case). How is this going to help the local distributor sell more baijiu?

If you are doing a "Cultural World Tour", I don't see how you can finish your first stop and not announce where else you're going. Unless you just decide as you go along and book all the air tickets, accommodations, venues etc at the last minute. The sheer implausibility of it all should be obvious. I will not be surprised if Singapore is in fact the ONLY stop on this "Cultural World Tour".

I don't have any smoking-gun proof that they are running a scam, but IMHO this "Cultural World Tour" reflects very badly on the professionalism of the management.

As usual, YMMV.

[rogerwilco]

Anyone know what is their IR contact?

LLI, you should go to SGX website and download one of Dukang's presentation. IR contact info can be found on the last page of the presentation.

[Wildreamz]

IMHO, although I understand why Singaporeans in general are deterred by S-Chips, I think generalizing S-Chips as all fraudulent is going to cause some solid companies to be unfairly dismissed by local investors.

The question is how to identify these undervalued gems.

(vested)

[sgd]

Berkshire Hathway also don't pay dividends.

[investor101]

Berkshire Hathway also don't pay dividends.

Berkshire Hathway has a reputation for honesty. Far too many PRC companies don't.

Most of the time, if PRC companies don't pay dividends under the reasons of needing cash for expansion, what they probably mean is that they want to find an indirect way to keep all that spare cash for themselves.

Vast majority of PRCs don't see honesty as a virtue. They can't understand the concepts of Buffett, since integrity is a big part of it. If PRCs don't even have faith in their own baby milk, you think they will have faith in their own corporate book keeping?

Even though I am Asian, I feel that honesty is not a big part of most Asian societies, except in the most developed ones like Singapore, Hong Kong and South Korea. Corrupted like dunno-wat in vast majority of Asian countries.

Beware lah!

[Stockerman]

If the China people can sell substandard milk powder to "poison" and KILL many of their own helpless poor babies in their own countries, I don’t see why they can’t sell substandard baiju.

They have no qualms about hoodwinking all the gullible investors in spore..

In time to come, we will get to hear juicy news!
their model is not sustainable in the long run...
Just wait and see!

[rogerwilco]

Another recent question and answer (via e-mail) between me and Dukang's IR Manager Mr Ngo Yit Sung.

Disclosure: i am long Dukang. This is not an invitation to buy/sell. Every investor should do his/her own homework.

1. Regarding Dukang's trademark

I recently read about Wanglaoji trademark dispute between Guangzhou Yangcheng Pharmaceutical vs Hung To Group Co (Jiaduobao Beverage Co., Ltd.) and can't help but thinking about Dukang trademark.

Is Dukang trademark wholly owned by Yichuan Dukang Jiuzu Asset Management (41% owned by Dukang Distillers Holdings Limited and 59% owned by Mr Gao Feng) ? Is there any possibility of Shaanxi Dukang Liquor Group or any other group bringing Dukang trademark dispute case into supreme people's court?

Yes, the Dukang trademark cannot be majority owned by foreign entity, and so the holdings company being registered in Bermuda cannot own the Dukang trademark wholly. The workaround is to let Mr Gao Feng own 51% of the trademark as he is a PRC Chinese while Dukang Distillers owns the other 49%. Mr Gao has entered into 2 agreements with the Dukang Distillers: 1. To grant irrevocable use of the Dukang trademark to Dukang Distillers to produce and sell Dukang baijiu. 2. To sell back his 51% stake to Dukang Distillers at cost whenever the PRC law allows us to fully own the brand.

There is no dispute as we own the Dukang trademark and Shaanxi Dukang owns the Baishui Dukang trademark. Before the acquisition of Luoyang Dukang in 2010, both Ruyang Dukang and Yichuan Dukang generated RMB300 mil sales annually, today Luoyang Dukang's sales is more than RMB1.3 bil (9M13), more than 4-fold since the acquisition, whereas, Shaanxi Dukang's sales is still below RMB100 mil per annum.

2. Regarding recent Siwu production disruption

Has the production disruption issue been resolved? Can Siwu production volume be fully restored this quarter (April-June 2013)?

The Siwu production disruption is due to relocation of the plant to be integrated with Luoyang Dukang. It has been completed in January 2013, we expect Siwu's sales to normalize in future.

3. Regarding Siwu distributor for outside Henan province

In page 28 of the 2013-Q3 presentation, number of Siwu distributor for outside Henan province is zero.
For current quarter (April-June 2013) are you still focusing Siwu sales on Henan province? Looking ahead for the next quarter, what is management plan on Siwu distribution network and marketing outside Henan?

Siwu is a provincial brand, due to its brand appeal, it is very hard or requires huge effort from us to promote this brand out of Henan. As most of our resources are channeled to grow Dukang, Siwu's sales will be flat or marginally increase/decline.

4. Regarding Dukang's interest income and cash balance

Looking at Dukang's Q3-2013 and Q4-2012 financial result, why is the interest income for Dukang's cash balance so low? (0.16% for Q3-2013 and 0.78% for Q4-2012). Without sacrificing the liquidity and operational needs (advertising plan, land lease commitment, working capital requirement, raw material purchase commitment, etc), can we get better use of the cash balance?

The low interest income is because the cash is kept in current account. We have plans in the pipeline, we will share the capex for future expansion when the time is ripe. Recently we announced the acquisition of office space for rmb106 mil

5. Regarding Dukang's grain alcohol production

Is there any possibility of contamination during grain alcohol production? if yes, could you please share a bit about Dukang's management current action to prevent and minimize the contamination? if such contamination happened, can the grain alcohol be sourced from third parties without sacrificing the baijiu quality?

There is of course contamination risk in our production. We do periodic sample test on the grain alcohol, meaning we extract sample and send to our in-house lab for examination. Contamination during production like the plasticizer is mitigated by not using plastic container to collect the freshly distilled grain alcohol, all the while we have been using stainless steel container. It is unlikely for our workers to sabotage the distillery as we are one of the largest employer in Ruyang district and Yichuan district in Luoyang City.

If there is an excursion, we are able to purchase external grain alcohol to produce our baijiu and that's when our technical team will play a vital role in ensuring the taste, fragrance and quality remains the same as before. We currently boast the largest technical team in Henan with 3 national level brewmasters and 22 provincial level brewmasters.

But again the chances that all our grain alcohol being contaminated at the same time until we do not have enough for production is very low as we store our grain alcohol in different facilities and only authorized personnel are allowed to enter the facilities.

[CY09]

Thanks Roger,

Rather standard answer for the question on its cash balance. Just wondering it seems that many S-chips (textiles, oil gas, distiller etc) all keep a wonderful amount of cash in their balance. I notice many of companies are the below the 500M market cap, hence I would like to ask anyone with China experience, is it a norm for business listed and non-listed to keep so much cash or is this trend only prevalent in our SGX-listed entities?

[Stockerman]

of all the PRC friends I have thus far, less than 5% of them are "'clean"...
So what do u think of the PRCs at the corporate level?

Berkshire Hathway also don't pay dividends.

[rogerwilco]

CY09, I recently tried to compile a list of SGX listed companies with their interest income vs cash balance. All data are based on 2012 annual report.The list is certainly not comprehensive.

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(if you cannot see the image, see it on this jpg attachment     )

Anyone has data on China's current account average interest rates?

Update: updated with CY09 data and correction