Dukang

Ngo Yit Sung, Dukang Distillers' Corporate and IR Manager recently answered another round of questions I sent to him via email

Disclosure:
I have Dukang shares. The q & a below IS NOT an invitation to buy or sell Dukang shares. Every investor should do his/her own homework and decide independently.

1. Could you please share a bit more about Dukang's capex/investment plan for the next fiscal year? will the future capex/investment plan be funded internally or are you considering other additional funding resources?

Answer:
We will need to increase our fermentation pools in line with sales increase, this is to ensure the consistency of our baijiu quality. Estimated A&P/Sales ratio will be approximately 12%. However please note that, as we communicated earlier, there is no fix formula to tell how much increase in A&P investment will yield how much increase in sales. There is plan in the pipeline and we will make the appropriate announcement from time to time. It will not be appropriate for me to disclose to you if it's not announced, hope you would understand.

2. According to a recent report by Frost & Sullivan, local governments' protection of local brands, which jeopardizes fair competition in the market is one of the key restraint of the baijiu industry (Bright Future for White Spirits => www.chinadaily.com.cn/cndy/2013-06/17/content_16628616.htm ). As Dukang is expanding to neighbouring provinces what is your strategy to overcome this challenge? Related to question no 1, what is Dukang 's view of acquiring local baijiu distillers (local brands) outside Henan? or do you convince that Dukang brand has enough appeal for national market (and therefore will concentrate the capex on Dukang brand)?

Answer:
We will continue to channel our focus and resources to grow Dukang at the moment, so we will not acquire any other brand in near future. We strongly believe the Dukang brand is able to go national due to its heritage and culture. Furthermore, now we are in the MFA(Ministry of Foreign) list with other first-tier brands to be used to serve foreign dignitaries and more than 200 China Embassies worldwide. Note that Dukang was once a national brand and sales was higher than Wuliangye in the 1980s. Through proper management and execution, we believe another round of triumph for Dukang is imminent.

3. As more and more foreign alcohols (wine, beer, bourbon, cognac, scotch, etc) enter China and become more popular, what is Dukang Distillers view on how to make baijiu more appealing for the newer/younger generation/person who has never taste Baijiu before?

Answer:
Baijiu is still the mainstream alcoholic beverages in China, especially in our best selling region in the PRC (like the west, central and north eastern part of China). This is due to the Chinese culture and the extreme cold weather. Baijiu is consumed mostly during meal time. It's rare to see the Chinese drink whiskey when they dine. Wine maybe at first-tier cities like Beijing, Shanghai, Guangzhou, Shenzhen due to the exposure to Western culture. They drink beer during summer but in winter, baijiu is very good for warming up the body.

For now, we will focus on our current strategy to promote the Dukang culture and heritage, we think that the Dukang brand is best for promoting the Chinese culture due to its unparalleled history.

4. In light of competition with top-end manufacturer (Kweichow Moutai, Wuliangye, etc) who entered the middle market and Dukang's frequent mention about the importance of packaging design (IPO prospectus page 33, 37, 109) could you please give more info about Dukang's package design development after the IPO ? is there any seasonality in the packaging design?

Answer:
We have engaged the designer who designed the popular Guojiao 1573 packaging to design the Jiuzu Dukang packaging. There is no seasonality in packaging design.

5. Ever since the acquisition of Dukang brand, the brand has continued to contribute profit and sales contribution to the company. Other than the appeal of the brand name, what factors in Dukang's management view that makes Dukang wine great?

Answer:
The source of water which is from the Dukang spring is unique as it contains mineral beneficial to the human body. The prawns in the Dukang river come in pairs and the ducks which fed on the prawns laid eggs with double egg yolk. We have secured some spring holes and constructed a structure to protect our water source.

As for the sommelier, we currently boast the largest technical team in Henan with 3 national level sommelier and 22 provincial level sommelier. They are the one responsible to come up with quality and popular blend for our products.

6. After Mr Gao Feng sold all his remaining Dukang Distiller's shares, is there any change in the Dukang trademark ownership? (via Yichuan Dukang Jiuzu Asset Management) -

Answer:
Mr Gao has entered into 2 agreements with Dukang Distillers during the acquisition in May 2010: 1) To grant irrevocable, long term use of the Dukang trademark to Dukang Distillers, and 2) To transfer the stake of the trademark to the Group at cost whenever the PRC laws allow us to fully own the brand. If there is a transfer in the Dukang trademark ownership, we will ensure that both terms will be in place. We will need to wait till the share transaction to be completed before commenting further.

TQ Roger. On a scale of 1-10 (with 10 as the highest level), how much confidence do u hv in DKK?

Anyone going to Dukang AGM this afternoon? Pls share what you heard ...

What happened to Dukang? Sell down.....

The vibes are not positive from the AGM.

www.nextinsight.net/index.php?option=com...cle&id=7586&Itemid=1

Dukang Chairman/CEO has stated that the company "will also downshift to aggressively promote our mid-end products and more affordably priced premium products. As a result, we may be selling more baijiu in terms of volume but the margins will be lower."

This strategy shift will have severe implications for the "Dukang" brands:

FY2013......Regular series..Premium series
Vol(tonnes)......29,330........4,580
Price
(RMB/kg)............195...........34
Revenue(RMBm).......890..........994
Gpm(%).............34.8.........54.2
Gross profit
(RMBm)..............310..........539
Gross profit
(RMB) per tonne..10,570......117,686

Gross profit from a unit of premium Dukang sold was therefore 11 times that from a unit of regular Dukang.

To make up for lost ground, the company has to step up production of regular series aggressively. There may be resource constraints.

Having said this, it must be recognised that baijiu will still be a viable business and "Dukang" has strong brand equity.