Dukang's earnings have surged since it acquired the Dukang brand in 2010. The 2nd and 3rd quarters of its financial year are seasonal peaks.

IN SPITE of a challenging year for the baijiu industry, Dukang Distillers’ sales volume and average selling prices have continued their stellar growth.

It posted 36.7% year-on-year growth in 2Q2013 sales at Rmb 738.3 million and 52.5% growth in net profit attributable to shareholders at Rmb 144.0 million.

Net profit margin increased by 2 percentage points from 17.5% to 19.5%.

Challenges faced by baijiu players included a slowdown in China’s economic growth, a clampdown on the use of luxury baijiu as gifts to officials, a ban on the serving of expensive liquor at military and government receptions as well as fears about the use of plasticizers in expensive liquor.

CEO Zhou Tao speaking with shareholders after the recent AGM. NextInsight file photo

“We have minimal exposure to the clampdown as it targets first-tier baijiu brands,” said CEO Zhou Tao during a teleconference last Thursday with analysts and investors.

“The decline in demand for first-tier baijiu brands is an opportunity for us to develop our second-tier baijiu market. Dukang is currently a second-tier brand,” he explained.

During the past quarter, Dukang stepped up advertising and promotion of its Dukang brand to target the premium baijiu market. There were TV commercials, bus and rooftop advertisements throughout China.

As a result, sales of Luoyang Dukang premium jumped 74.3% to Rmb 226.7 million while sales of its regular series were up 69.7% at Rmb 310.2 million.

The increase in advertising and promotion resulted in the Group’s selling and distribution expenses growing 35.7% to Rmb 64.5 million. Selling expense accounted for 8.7% of Group’s sales.

The Group recently completed its internal restructuring exercise to fully integrate the business and operations of its two baijiu product lines - Siwu and Luoyang Dukang.

This solves the production bottleneck for Siwu products and facilitates greater cost efficiency and economies of scale.

Below is a summary of questions raised at teleconference and the replies made by Mr Zhou and financial controller Raymond Ho.

Q: How does the consumer ascertain your liquor has been aged 20 to 40 years?

We had independent experts evaluate the age of each fermentation pool. We are creating records to identify the character of each pool.

Q: Your cash reserves are large but no dividends are paid. What evidence is there that the cash is real?

BDO Hong Kong and BDO Singapore are external auditors that jointly verify our financial accounts. We have Rmb 730 million in cash reserves. We have Rmb 60 million of outstanding bank loans.

We have budgeted Rmb 40 million for expansion in Taiwan. Rmb 200 million has been earmarked for capacity expansion. (700 fermentation pools are being dug and the company expects to complete this by July.)

We are considering allocating Rmb 200 million for operations of the facilities at Ruyang (Luoyang) and Yichuan (Zhoukou). As for the remaining Rmb 200 million, we are considering it for dividend payouts.

Executive chairman Gao Feng

Q: How is your cash managed?

We have some in fixed deposits. We have some in current accounts for operational needs.

Q: Are you carrying out a brand valuation exercise?

We have not conducted a brand valuation exercise, but an independent valuer that was not commissioned by us valued the Dukang brand at Rmb 500 million. This is much higher than our acquisition price of Rmb 300 million for Dukang in 2010.

Q: What is your non-current asset of interest in associate of Rmb 160 million?

The Rmb 160 million represents our 49% interest in Yichuan Dukang. Because of the national and cultural importance of the Dukang brand, as wholly owned foreign enterprise, our SGX-listed entity was not allowed to be a majority shareholder when we acquired 49% in Yichuan Dukang for Rmb 300 million.

Our executive chairman, Mr Gao Feng, being a PRC national, was permitted to buy the remaining 51% stake in his personal capacity. Because of his personal stake, Mr Gao gets sales royalty of 1.5%

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