Dukang Distillers undervalued, says OSK
At 38 cents a share, Singapore-listed Dukang Distillers deserves better valuation, according to OSK Securities Hong Kong analyst, Dr Jason Siu.
After his recent visit to Dukang Distillers’ production plant in Ruyang, China, he published a report (on 16 Jan) saying that the producer and seller of Chinese heavy liquor was trading at a huge discount to its Hong Kong and China peers in spite of being equally profitable, if not more so.
Dukang has a return on invested capital of 20% versus its China and HK-listed peers’ 16.5%. However, it trades at 7.1x 12-month trailing PER and 8.3x FY11 earnings vs. adjusted Asian peers’ average of 10.0x PER of FY10/11.
Including all China A-share peers (such as market leader Kweichow Moutai, 600519.CH), the sector trades as high as 31.3x over the same period.
What impressed the analyst: sales growth of the Dukang brand was up 120% year-on-year in 4QFY12, its brand presence and distribution network.
1) Branding
The company has two major brands of Chinese heavy liquor, or Bai Jiu. The Dukang is a traditional alcoholic formulation lauded by famous Chinese kings, most notably Cao Cao. The other brand, Siwu, has won various recognitions in Henan Province.
2) Expanding distribution network
The company has about 239 distributors over the country (incl. 69 for Siwu brand), and has expanded to new markets, such as Tianjin City, and provinces of Guangdong, Guangxi, Heilongjiang and Gansu.
Risk: Sales volume of its Siwu brand fell 44% year-on-year in 1QFY12 due to restructuring of its distributors.
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Comments
The less popular brands compete on price.
Unfortunately, it seems that Siwu is not selling well. A friend who was in China recently asked for it in a restaurant and the waitress said this brand is doing badly.