Thursday, 11 April 2013

Dukang Distillers

Kim Eng on 11 Apr 2013

Dukang: a promising new player in China baijiu market. Dukang Distillers Holdings is a producer and seller a wide range of white liquor (or “baijiu”) products based in Henan province, sold and marketed under the Dukang and Siwu brands. The Siwu brand is targeted at the low to mid-end market, while Dukang is regarded as a medium to high-grade product.

Rebirth of a valuable brand. Dukang was the name of the forefather of baijiu. The name has been cited for centuries by numerous poets and famous figures, and holds a special place in Chinese culture. There used to be two factories in Henan province that claimed the right to use the Dukang brand name. Over the years, these factories frequently engaged in price wars and legal tussles that significantly eroded the brand’s value. The two factories merged in 2010 and since then, the new company, Dukang Distillers, has been working on turning around the business and rebuilding brand value.

Gradually gaining market share in Henan province. Currently, the Henan baijiu market is dominated by national brands such as Moutai and Wuliangye. Since the merger of the two Dukang brands, Dukang has increased its market share in Henan to around 3%. Management is targeting a market share of 10% by way of capacity expansion, development of its distribution network and more marketing efforts.

Could be a target for privatisation. We think Dukang could be privatised because of its strong profitability and as net cash of CNY671 accounts for 51% of current market cap. Also, its current share price is close to its IPO price. The most likely potential buyer, in our view, would be the founder of the company or other bigger players in the industry.

Valuation. Dukang’s current valuation of 4.3x 12m trailing PER and 0.7x PB is not expensive when compared with A-share listed peers which are trading 14x PER and 4x P/B. The undemanding valuation is perhaps due to the low brand recognition. We currently do not have a rating or target price for Dukang. However we think a re-rating is possible if its brand value continues to be enhanced.

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