DUKANG DISTILLERS' financial year ended June 2015 presented an unprecedented loss in its business history.

Sales revenue, which had peaked in 2013 at RMB 2.4 billion, came crashing down to RMB 863 million. That 64% drop over three years is a telling sign that management had not done enough to arrest the problem when it initially surfaced.

400 billboard at Zhengzhou Billboard advertisement on Dukang's baijiu at Zhengzhou. File photo. Since 2011, Dukang had never reported a loss, and saw its profits peak at RMB 390 million 
in 2013, but now it has reported a huge loss of RMB 561 million in 2015 financial year.

Hitting the bottom line was an impairment loss of RMB 471 million on plant and equipment, and RMB 76 million impairment loss on intangible assets and interest in associates.

Gross profit margin on sales was 24.7% vs the previous year's 36.4%, with management blaming product mix as the culprit. But it appears that price erosion could be an added factor.

Its Siwu regular and premium brand had disappeared in 2015 and not a single dollar of sale was recorded.

Loss per share for 2015 was RMB 0.70 (S$0.154) vs previous year EPS of RMB 0.055 (S$0.012). Its NAV per share now stands at S$0.40.

Its working capital is still healthy, with cash of RMB 403 million.

However, its inventory level of RMB 664 million is still very high compared to the previous year's RMB 690 million despite a significant decline in cost of sales.

This means that Days Cost of Sales in Inventory for 2015 has gone up to 373 days versus previous year of 271 days.

There was no record of inventory obsolescence provision in 2015 or write down of inventory to fair market value.

Stock price  8.6 cents
52-week range 8.0 - 19.1 cents
PE (ttm) --
Market cap S$68.7 million
Price/book 0.157
Dividend yield --
Management has mentioned some remedies in the coming year to arrest the decline in revenue, one of which is by by expanding mass consumption in the mid-to-long term.

The other is to remain "committed to its advertising and promotional activities in its home market, Henan province and penetration plans into mass market by promoting its Jiuzu Dukang series and Mianrou Dukang series".

Whether the two strategies would bring its revenue back to its glory days is yet to be seen.

Further deterioration of its financial performance will weaken its balance sheet and financial resources to carry out whatever plan the company may have to stem its fall in revenue and profits.

Capable leadership is required, and both product plus geographical diversification may be the remedies to reverse the current problem in China where blame has been placed on China’s current austerity measures on luxury gifts and spending.


ChanKitWhyePrior to his retirement, Chan Kit Whye (left) worked more than 30 years as Regional Finance Director, Financial Controller and Manager in a multinational specialty chemical business. He has played an active role in CPA (Australia) Singapore Branch, taking up positions in its Continuing Professional Development and Social Committees.   Kit Whye is a Fellow of CPA Australia, CA of Institute of Singapore Chartered Accountants and CA of the Malaysian Institute of Accountants. He holds a BBus(Transport) Degree from RMIT, MAcc Degree from Charles Sturt University and MBA from Durham Business School.

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