Dukang Distillers

Kim Eng on 23 Mar 2012

Background: Formerly known as Trump Dragon Distiller Holdings, Dukang Distillers engages in the manufacture, sale, and distribution of Baiju products in the PRC. Previously, the group sold only its house brand, “Siwu” Baiju, in Henan, catering to the mass-to-mid market. In 2009, the group acquired Luoyang Dukang Holdings, which provided the company with the window of opportunity for expanding into the mid-to-high end segment of the Baiju market and beyond the Henan province. The group went on conduct TDR listing and raised RMB297m to aid the expansion. Moreover, Dukang leveraged on the listing to extend its product series into OEM sake through

Shift in product strategy. Dukang is orienting the Luoyang series towards the mid-to-high end market and Siwu to the mass-mid end segment. Luoyang’s regular and premium series currently command gross margins of 53% and 55.4%, respectively, as opposed to 26.2% and 32.5% for the Siwu series as of 2Q12.

From 50% to 100% production capacity. After undergoing the consolidation of Luoyang Dukang and utilising an extra 50% capacity with 1,470 fermentation pools for the series, Luoyang Baiju has become the group’s primary driver. It has achieved sales of RMB 312.9m that constitutes 68.9% of the group’s revenue as of 2Q12. This performance is in sync with the increase in the number of distributors from 80 to 114 in Henan Province and from 22 to 56 across the rest of China as of September 2011.

Letter of intent signed with Lotte Beverage. In Nov 2011, the group signed a letter of intent with Lotte Chilsung Beverage Corporation (over US$30b sales annually), a South Korean beverage company, to distribute the Luoyang series through Lotte’s distribution network of over 90 sales branches.

Valuation. The group holds a strong balance sheet, backed by a strong net cash position of RMB709.3m, thanks to positive operating cash flows and TDR proceeds from 2011. Compared to peers trading at 28x PE, the group is trading at a huge discount of 9.4x its historical PE.