dd_stkprx2.13

IT IS apparent that Dukang Distillers is a laggard in the recent market rally. Dukang’s price had suffered a setback in November.

This was after the official Xinhua news agency cited findings by Hunan provincial authorities that excessive plasticizers (i.e. toxic chemicals which can induce early female puberty and cause damage to men's reproductive health if consumed over a prolonged period) were found in Jiugui Liquor products.

In addition, there was continuous strong anti-corruption rhetoric from the new Chinese leaders which might reduce demand for expensive baijiu. 

Exensive baijiu such as Moutai are often used as gifts for local government officials. 

Furthermore, according to an article published in the PLA Daily (i.e. the official army newspaper) last month, expensive liquor has been banned in military and government receptions. All of these developments contributed to the weakness in the share price performance of baijiu players, which undoubtedly also affected Dukang.
Notwithstanding such developments, I will like to point out several noteworthy aspects of Dukang.

Point_of_sales4
In Luoyang city: Investors check out stores selling Dukang products. The Dukang banner can be seen prominently displayed. NextInsight file photo
1. Dukang’s end customers are not the military
 
According to Dukang, their products are sold through distributors to mainly hospitality establishments, supermarkets and specialty stores selling tobacco and alcohol products in the PRC.

Thus the ban on expensive liquor at military and government events does not have a direct and significant impact. Nevertheless, there may be indirect effects, such as the possibility that other baijiu players may start to divert some of their attention from military and government to sectors such as hospitality and retail.

2. Dukang’s products are not as high end as Moutai or Wuliangye
 
From the news that I have gathered, expensive baijiu is indeed being replaced by less expensive baijiu at offiical banquets, thus this may have a net positive effect on Dukang over the long term.

Dukang products are priced around RMB300-1,000 with 1,000 being their top end product. (Moutai’s products are typically more than RMB1,000).

During a teleconference with analysts in Nov 2012, management said government curbs may arguably lead to an increased demand for more affordable alternatives such as Dukang’s products.
(Readers can refer to Nextinsight’s takeaways from Dukang’s teleconference with analysts.

3. Results – 2Q & 3Q are key
 
1QFY13 revenue and net profit ended Sep 2012 rose 68% and 75% to RMB407m and RMB64m, respectively. That was typically a lull quarter, yet results were very good.

According to 1QFY13 results announcement, management remained upbeat on prospects and believe the upcoming 2Q and 3Q should be good due to festive seasons. It would be interesting to see the management’s outlook in the coming quarters in view of the recent industry headwinds.

Investment risks
1. Government regulatory concerns
 
As mentioned above, the ongoing government regulatory concerns are major headwinds to the industry. It remains to be seen whether the current government curbs will have any adverse long term effects on Dukang (or long term benefit to Dukang). Any new measures from the Chinese leaders would also pose risks to the industry as a whole.

2. Cessation of substantial shareholders over the past three months
 
On 24 Jan 13, it was reported on the SGX that “CIM XIII LTD distributed the shares of Dukang Distillers Holdings Limited to its shareholders via dividend in specie and to Centurion Investment Management Pte Ltd for fees incurred”.

As there is limited information available, it is difficult to judge the impact on such action but there may be a risk that these shareholders may sell the shares on the open market.
In addition, on 20 Nov 12, OZ Master Fund ceased to be a substantial shareholder by selling 21.5m shares in an off-market transaction. (Do refer to the SGX announcements for more information)

3. Slumping prices for Moutai and Wuliangye products
 
Based on an article in the China Daily on 14 Jan 2013, the retail prices for Moutai and Wuliangye products reportedly dropped as much as 60% due to promotions in supermarkets and department stores.

This might be due to distributors who had stocked up Moutai and Wuliangye products because they had expected them to appreciate in price as the festive seasons approach.

However, the government curbs affected demand and the distributors had to sell at cheaper prices, or else they may suffer losses on their inventories. Nevertheless, such a decrease in price may narrow the difference between Moutai, Wuliangye and Dukang’s highest end products which may ultimately affect Dukang.

4.  Usual S-chip risks
 
In addition to the usual corporate governance risk surrounding S chips, they face liquidity risk and price risk.

For Dukang, its average 30D & 100D volume amount to around 4.6m and 3.6m of shares, respectively. Thus, it is not exactly an illiquid stock. The recent price performance has been lackluster but it is resting on a strong cluster of supports of around 0.305 – 0.315.

Valuations trading at a steep discount vs peers

According to Bloomberg, Dukang trades at a historical PE of around 5.1x vis-à-vis the industry average of around 17.4x. In it latest 1QFY13 results, Dukang’s NAV per share was around $0.40 vs the market price of $0.310 last Friday.

In a nutshell, Dukang’s upcoming 2Q and its outlook in the quarters ahead may prove to be a rerating factor if they continue to deliver. 


 

*Readers who wish to view the Dukang chart / Dukang's financial results can email me at This email address is being protected from spambots. You need JavaScript enabled to view it.. This writeup was sent out to my clients last Sunday and published on my blog.

Recent story: DUKANG DISTILLERS: To launch top-grade sake in PRC


Comments  

0 #1 Puzzled 2013-02-05 10:16
Dukang is nowhere near the league of Moutai...
If premium baijiu is not allowed on dinner table, Chinese will turn to Taiwan KaoLiang or even wine...serving cheap baijiu is a big no no to entertain guests in china.
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