Dukang Distillers Holdings

[egghead]

With ASP under pressure causing reduced gross margin, and higher marketing costs reducing net margin; Dukang needs to go lower end via Siwu and play the volume game. However, I understand they are currently at max capacity utilization. As such, it will be a while before things turnaround.

[Wildreamz]

With ASP under pressure causing reduced gross margin, and higher marketing costs reducing net margin; Dukang needs to go lower end via Siwu and play the volume game. However, I understand they are currently at max capacity utilization. As such, it will be a while before things turnaround.

I would rather they focus their effort on mid-range.

Low end Baijiu market is like commodity business with not much profit margin.

But of course they are the experts here.

Regarding capacity, I understand that they have some capex last year to increase their capacity, I'm still wondering why their new plant and property haven't start delivering yet.

[egghead]

Yes, they need to execute the capacity expansion well, with the usual start up costs, problems (if any), etc. But bear in mind that the entire industry is likely going to do the same strategy? As usual, with the current situation, only the strong ones will survive. Will DK be strong enough to survive; or will they end up being acquired by big players at a low price?

[specuvestor]

Specuvestor make some pretty common sense and good point. I don't see why Wang Peng or any other interested party would not take this chance to buy up Dukang's remaining shares at depressed price.

You got my drift The corollary also means that earnings is not likely to recover, in order to advance his interest.

[Wildreamz]

Yes, they need to execute the capacity expansion well, with the usual start up costs, problems (if any), etc. But bear in mind that the entire industry is likely going to do the same strategy? As usual, with the current situation, only the strong ones will survive. Will DK be strong enough to survive; or will they end up being acquired by big players at a low price?

Most of the entire industry is already facing the problem of overcapacity as they were too optimistic on the growing demand of Baijiu.

Dukang has been more conservative in expanding capacity and focus more on marketing thus far. However, they still lack the scale and brand recognition of other brands.

The biggest asset of Dukang is actually their rights to the "Dukang" name, which is also name of a place, a legendary liquor maker, and a metonymy for good wine.

But even the "right" to the name is not guarantied, because there is another Baijiu company marketing their Baijiu using the Dukang name (Baishui Dukang).

[arriyana]

What do you think of the new management that took over Dukang? It is a cause of concern that the previous founder actually cashed out from the company (and not at a high premium).

[Wildreamz]

What do you think of the new management that took over Dukang? It is a cause of concern that the previous founder actually cashed out from the company (and not at a high premium).

Actually most of the management remained the same.

In FY2012:
Executive Chairman: Gao Feng (高峰)
Deputive Executive Chairman and CEO: Zhou Tao (周涛)
Executive Director: Ma Ke (马珂)
Executive Director: Li Dong (李东)

In FY2013:
Executive Chairman and CEO: Zhou Tao (周涛)
Deputy Executive Chairman: Zhang Dingjun
Executive Director: Li Dong (李东)

The man behind Dukang's success, however, should be credited to General Manager Wu Shu Qing (吴书青). Ex-Chief Marketing Officer of Synear Food Holdings. (I know, I know)

He seems to be a man of foresight. Highly encourage fellow long term investors to Google this man.

Edit: I am not familiar with the Synear Food Holdings saga. Can someone care to summarize it for me?

[arriyana]

I am not sure of Synear Food Holdings Saga but it was delisted after a long losing streak. most Synear investors lost out when it was delisted.

[touzi]

There was no fraud in Synear Food. No accounting issues, no factory fire that destroyed documents.

There was a case of food contamination which was not disclosed promptly to SGX. This is a transparency issue.

Then there was the delisting which was way below IPO price. Minority shareholders felt they were treated shabbily.

By not responding to Investor Central's queries, it would seem like the old habits of Synear Food has been brought over to Dukang.

[Wildreamz]

For the benefit of fellow buddies, I'll try to summarize the current substantial shareholders.

Based on SGX latest filings:
1. Wang Peng (Treasure Winner) = 29.5% (average price paid = 47.4c)
2. Dou Wu (Kaifeng Tian Mills) = 14.34% (average price paid = 47.4c)
3. Fidelity International Limited/Pandanus Partners = 7.32% (last average price paid = 45.16c in Oct 2013 for 0.42%)
4. Public = 48.84%

Source: SGX, The Next Insight

Important points to note:

1. The transaction between Gao Feng and Wang Peng/Dong Wu was completed on 7th Dec 2013. Hence, the earliest date that Dukang can be bought over from the public, without initiating a GO at $0.474 is 7th June 2014 (4 months from now).

2. While researching the ownership of Dukang I came across this interesting article, again by Investor's Central (kudos): http://sg.finance.yahoo.com/news/dukang-...00776.html

This might be a potential red flag for some. But since both Synear and Dukang are based in Henan, it is not surprising that they may share some common stakeholder.

I personally believe it is highly unlikely that they are concerted parties, ymmv.

3. IMO, even if the price of Dukang do not recover by December 2014, the likelihood that Wang Peng can complete a GO (90% acquisition of outstanding shares) at a low ball price is highly unlikely to pass the blockade of Kaifeng (I am not sure if they could abuse a loophole in the system, even if they ARE concerted party) and possibly Fidelity.

And I think mass public acquisition of shares by the major shareholders, should cause the price of shares to rebound upward.

4. In the case of Synear, from what I understood from Puntersgallery, when the offer was given, they already had most of the voting rights they need and were trading at quite high PE due to a long losing streak, their future also didn't seem too promising. Their offer was about 30% premium to their average trading price 6 months prior. Hence, their offer seems "fair" at that time,

They were delisted at a very low book value of about 0.4. Coincidentally, current book value of Dukang is about 0.4. (Downside limited?)

5. Provided that Dukang can remain profitable after the intense price cut and competition by all the top players in the brewery industry in China, and grow their profit and market share steadily starting from next financial year. Their long term business prospect should remain intact and we as shareholders should remain vested for the growing cash flow, astute management and low valuation.

Note that this is a very difficult thing to do. Top teir brands like Maotai and Wuliangye, are eying the lucrative mid-tier Baijiu sector. They themselves are desperately trying to remain profitable in the aftermath of the austerity drive.

6. The first quarter result is actually not too bad. They are still generating lots of positive cash flow with little to no debt. The reduction in profitability mainly came from the increase spending in advertisement and marketing. This is about the only thing they could do right now: brand building and increase market share. After all, a strong branding power is about the only thing that could give them a competitive advantage and allow them to earn a healthy profit margin.

I made a mistake saying that Dukang doesn't have a long brand name earlier on. The Dukang name is famous in itself and was one of the top Baijiu brand in the 80s. But I think there were some issues and they got fragmented, hence, they do not have a strong market presence today as they missed the growth period (2000s-2012) of the Baijiu industry.

But Dukang has been quite outstanding in marketing itself and increase their presence in Henan since Wu Shu Qing took over management in 2009. Henan also happen to be one of the fastest growing economies in China.

See below for one of their marketing strategy, producing short films to promote the Dukang brand:
http://www.56.com/u20/v_ODU1NDQxOTM.html

据了解，在河南甚至中国酒类行业中，洛阳杜康控股有限公司不仅是最早涉足微电影的酒企，而且在投资拍摄的微电影数量以及摘得的奖项数量等方面，均以明显优势稳居第一位。其中，《父爱》先后斩获河南省首届微电影大赛一等奖、首届亚洲微电影艺术节“金海棠奖”一等奖、“金丹若”西安国际微电影艺术节优秀奖等三项大奖。而《爱，就要回家》也跻身2013北京国际微电影艺术节传统节日主题单元十强。m

Translation: Dukang is not only one of the earliest Baijiu brand that made short films to promote their brand, they also the most dominant of alcohol companies, in terms of number of films produced and recognitions won.

7. During a deep recession, there are always more mergers and acquisition due to peer companies in financial distress. Dukang's financial position puts it both likely as a potential candidate of aquisition, as well as an acquirer.

This can be a very good thing or a very bad thing for the company (mostly good).

Please correct me if I get any of this wrong, I don't want to mislead people.

I bought in to this company never expecting it to face much trouble as Dukang managed to growth both profit and revenue for 2012 and a good part of 2013 despite the austerity drive. Should have expected that the austerity drive would attract intense competition. Definitely a misjudgement of their business risk on my part..

(vested hence biased)