Dukang Distillers Holdings

[CY09]

Wow roger, that is good!

I have 2 other S-chips data as well

Universal Resources: Cash s$27.5M, interest s$0.324M
Foreland: RMB 336M, Interest: RMB 1.153M

Hope this helps (used to own these 2 counters)

[rogerwilco]

Thanks CY09! I wonder how Midas can get such a high interest rates

[nathanmaloney]

I'm currently based in China so I'm very familiar with interest rates here. I can say the interest income as reflected in your chart by these companies are very very low.

I'm not sure what interest bearing vehicles these companies park their cash (maybe in the C suite exec's personal accounts?) but anything interest rate below 2% in china is questionable.

Saving accounts' interest rates are 2-2.5% currently while FDs go up to 3-4% depending on time frame.

Wealth management products can give you 4-5% depending on time frame.

In my experience with China clients, most companies do like to hold on to excess cash due to China's inherent lack of security, distrust of companies/people (including their own) and cash flow flexibility (esp when the company needs to close down)

Cash is easily drawn in times of need/crisis and things do change very fast in China, especially in the past 2-3 years.

While I understand the appeal of Dukang's corporate growth story, I'm quite mystified with Dukang's 50-60% rise this year.

The white wine market has shown great signs of weakness with the govt's austerity drive and Xi Jinping's directive of less-is-more is destined to put a damper on luxury and extravagance.

I bought Maotai for my customers last year as gifts at 2.5K RMB per teeny tiny bottle and recently I bought the same bottle at 1.6K RMB at the same place/same brand.

Talk about price adjustment.

Furthermore, Dukang's main market of Henan is a very poor province hence low margins and its lackluster brand name (Henan spirits is not prestigious or highly valued as Guizhou or Sichuan) will be challenging when it tries to market in bigger baijiu markets beyond Henan.

But I guess that's the wonders of hot money and penny stocks.

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.

[Image: vox4ll.jpg]
(if you cannot see the image, see it on this jpg attachment)

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

[CY09]

Roger I think Midas Cash holding is RMB 547,033,000 and not 33,XXX,XXX according to AR 2012. Mystery solved.

[HitandRun]

Hi Rogerwilco

As far as I know, the current account and fixed deposit rates offered by banks in China are quite standard, i.e. there is little differentiation between banks as I believe that the rates offered are somehow controlled by the central bank, PBOC. The main difference is in the tenure, with deposits with longer tenure enjoying higher interest rates. Sample Deposit Rates in May 2013

The interest rate on current accounts should be less than 0.5%. Companies may also buy money market funds (MMFs) or structured products to enhance their yield.

Incidentally, I'm curious about your investment in Dukang. I had some shares in Dukang until the recent run-up in the share price. The price and volume action in Dukang appears to suggest that an operator / operators are camping there. Do you not mind running with the wolves?

[rogerwilco]

Hi HitandRun,

Thanks for the interest rate info!

With the recent run-up in Dukang's price, i (personally and subjectively) think it is a bit riskier to add more position in Dukang however currently i haven't trimmed my existing position. I will wait for Dukang's next report before deciding.

[touzi]

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

Thanks for sharing with us your Q&A. I wonder if this reply means that the company is on the prowl for M&A or overseas expansion. The chairman certainly seems like a very ambitious person.

---

While I understand the appeal of Dukang's corporate growth story, I'm quite mystified with Dukang's 50-60% rise this year.

The white wine market has shown great signs of weakness with the govt's austerity drive and Xi Jinping's directive of less-is-more is destined to put a damper on luxury and extravagance.

I bought Maotai for my customers last year as gifts at 2.5K RMB per teeny tiny bottle and recently I bought the same bottle at 1.6K RMB at the same place/same brand.

In terms of reputation as a premium brand, I believe Dukang and Siwu has still some way to go compared to Maotai. Moreover both Dukang and Siwu have a regular series, not just premium products. While they are affected by President Xi's austerity drive, the impact should be less compared to Maotai. Kwei Chow Maotai's sales and profit increased by 19% and 21% respectively for Q1. In an interview with NextInsight, the company said that they expect growth to slow down this year and "may not be as high as 40%"

Furthermore, Dukang's main market of Henan is a very poor province hence low margins and its lackluster brand name (Henan spirits is not prestigious or highly valued as Guizhou or Sichuan) will be challenging when it tries to market in bigger baijiu markets beyond Henan.

I guess that must be the reason why they are spending so much on advertising.

Vested.

[rogerwilco]

Hi touzi, thank you for your insight.

Actually i still have question which might be more appropriate if being addressed to baijiu connoisseur (expert).

Regarding grain alcohol aging, in their marketing Dukang tries to shift customer perception from age of grain alcohol to age of fermentation pools (that produce the alcohol). Using this way, Dukang does not have to age the grain alcohol too long.

I am not a baijiu connoisseur (expert) so to be honest I do not know whether there is any taste/aroma difference between baijiu produced from a 20 years alcohol versus baijiu produced from 6 months alcohol but the alcohol produced from 20 years old fermentation pool.

Maybe someone who is more expert in baijiu can give more insight into this?

[touzi]

CNA just started a new series entitled "Get drunk in China". This morning's episode is on Maotai. I did not quite catch what the presenter was saying towards the end, but I think he is introducing next week's episode featuring Wuliangye.

[sgd]

I hear there's a wuliangye baijiu store along the main road of arab street not visited it though.

Maybe analogy would be to look at somebody when young always seems so restless full of energy with spunk and reckless all at the same time, time mellows that person, experience eventually smoothen out those rough edges and adds some character.

Same thing can apply when compares to drinking newly unaged alcohol always very fiery has a rough burn and gives a hangover like a dull axe but after a few years of aging it changes, a combination of seasons and tempreature from hot to cold over long periods of years forces the liquor in and out of the wood in the barrel where it takes on character in the end it's still the same drink but maybe better fragrance, smoother too - time changes everything.

http://www.chengduliving.com/chengdu-stories-baijiu/