Dukang Distillers Holdings Ltd - Who is behind purchase of 43% stake?

19/9/2013 – Dukang Distillers Holdings Ltd remains confident of maintaining its growth momentum, contrary to the industry's trend.

The company is the only SGX-listed producer of baijiu, a distilled liquor with about 40%–60% alcohol by volume, predominantly consumed in China.

The baijiu industry faces challenges such as 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, and fears about the use of plasticizers in expensive liquor.

Despite the challenges, Dukang Distillers believes the demand for baijiu remains resilient and it still has large room to grow due to its relatively small market share.

Dakung Distillers recorded higher revenue in each of the last five years and a higher profit in each of the last three years.

The company recently announced earnings for FY13:

Revenue: +31.7% to RMB 2.41 bln
Profit: +78.7% to RMB 389.7 mln
One-off gains/losses: RMB 11.1 mln vs Nil
Cash flow from operations: RMB 544.8 mln vs RMB 158.6 mln
Dividend: Nil
Order book: Not relevant

We have a few questions lined up for the company that its shareholders would want to ask at the forthcoming AGM on October 28.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Why did it choose donations over dividends?

Despite posting robust performance year after year, Dukang Distillers is yet to declare a dividend since its listing in 2008.

At the end of FY13, Dukang Distillers' cash reserve increased 61.5% to RMB 757.6 mln (refer page 3 of Q4 earnings report).

Moreover, the company had an overall net cash position with a negligible debt of RMB 84 mln on its books at the end of FY13.

Despite that, Dukang Distillers didn't declare any dividend for the year.

But what's even more curious is that the company had donated RMB 27.1 mln, during Q3, for improving educational environment in the rural area of Henan, China (refer page 12 of Q3 earnings report).

Obviously, the shareholders would wonder why the management didn't prefer dividends over donations.

Question

2. Which institutions and/or individuals did it donate RMB 27.1 mln to?

A RMB 27.1 mln donation is certainly a big amount.

The investors are already sceptical of the businesses of companies operating in China (popularly known as S-chips) because of the remote location of operations.

We are not alleging any wrong-doing at Dukang Distillers.

But shareholders deserve to know the institutions and/or individuals which were the beneficiaries of the company's RMB 27.1 mln donations.

Dukang Distillers has its production facilities in Henan province.

Also, its promoters/directors/controlling shareholders hail from the same province.

Therefore, is it possible that the beneficiaries of the donations are related to the controlling shareholders/promoters/directors of Dukang Distillers?

We don't know. But management can enlighten us.

Question

3. Who were the real beneficiaries of RMB 600 mln it paid to acquire Luoyang Dukang Holdings Ltd?

When Dukang Distillers listed on SGX in 2008, it was named Trump Dragon Distillers Holdings Ltd and its only baijiu production plant was located in the Zhoukou city of Henan province in China.

It used to market and sell its baijiu under the brand name of 'Siwu'.

It was much later, in 2010, that the company was renamed Dukang Distillers Holdings Ltd after it acquired Luoyang Dukang Holdings Limited which owned two other renowned brands of baijiu - 'Ruyang Dukang' and 'Dukang'.

The two newly-acquired production facilities were located at Ruyang and Yichuan counties of Henan province.

Apparently, the new production facilities were in the same province where Dukang Distillers already had a production unit.

According to a circular of Dukang Distillers, it acquired Luoyang Dukang Holdings Limited from five vendors - Bai Rui Trust Limited, Dukang Investment Group Limited, Guangdong Jimin Trading Development Private Limited, Henan Hantang Information and Technology Co Ltd, and Luoyang Gao Xin Shen Tai Industry Limited.

Unfortunately, it didn't disclose the people behind these five vendor companies.

As the vendors hail from the same province as the controlling shareholders/promoters/directors of Dukang Distillers, it makes us curious if they are related.

Three years since the acquisition, the question still remains relevant as Dukang Distillers used the IPO proceeds to partly pay for the RMB 600 mln acquisition.

So, please can we have the details of the people behind the previous owners of Luoyang Dukang Holdings Limited?

Question

4. Whom did it sell the factory that made it list on the SGX?

Last year, on November 30, Dukang Distillers announced a restructuring exercise in which it relocated the production facilities of 'Siwu' baijiu products and its inventory of grain alcohol at production plant in Zhoukou City to the production plants of 'Dukang' baijiu products in Luoyang city.

Dukang Distillers relocated due to lack of availability of industrial land for expansion in Zhoukou City.

Also, the company believes the increasing traffic congestion in the city would have adversely hit the cost of operations.

In less than two months, Dukang Distillers completed the restructuring on January 21.

After the relocation, the residual assets remaining in the Zhoukou City plant comprised mainly its land use rights, the building thereon, some residual production facilities and inventories it couldn't relocate.

Surprisingly, the January 21 announcement was not just about the completion of the restructuring exercise.

Dukang Distillers sold the now vacant Zhoukou City plant to Excel Glow Holdings Ltd for RMB 55 mln.

The sale was completed on March 14.

But it didn't disclose the people behind Excel Glow Holdings Ltd.

Question

5. Why did the directors retire and resign a fortnight after the announcement of the sale?

Ms Ma Ke resigned as an executive director of Dukang Distillers on February 5, a fortnight after the announcement of sale of Zhoukou City plant to Excel Glow Holdings Ltd on January 21.

The 41-year-old resigned citing personal commitments.

She was responsible for overseeing the daily finance and accounting operations of the company.

According to the 2012 annual report (page 14), Ms Ma joined the company in June 2005 as a director and chief financial officer responsible for overseeing the accounting matters at its production plant at Zhoukou City.

Was it a coincidence that she resigned soon after the Zhoukou City plant was sold?

Also, she wasn't the only director parting ways with Dukang Distillers.

On the same day, Zhang Wenzhe retired as an independent director of the company.

He is the father-in-law of Mr Gao Yong, who is the brother of Mr Gao Feng, the then-executive chairman and controlling shareholder of Dukang Distillers.

The board of the company, with the concurrence of the nominating committee, believed that Mr Zhang was independent in spite of his familial relationship with Mr Gao Feng's brother.

As per the 2012 annual report (page 15), 73-year old Mr Zhang Wenzhe is a consultant in economics to the Zhoukou City government.

Moreover, his retirement wasn't announced until that day.

Therefore, that makes us curious about the timing of his retirement.

Question

6. Did the new controlling shareholder really not trigger the open offer?

A month after two important exits from the board Dukang Distillers, the executive chairman, Mr Gao Feng, stepped aside citing health reasons on March 28.

Since then, Dukang's CEO Mr Zhou Tao has also been the executive chairman of the company.

Two months later, on May 28, Mr Gao Feng resigned as an executive director of the company, again, citing health reasons.

But with a 43.84% stake, he remained the controlling shareholder until last month (refer page 75 of 2012 annual report).

On August 7, Mr Gao Feng sold his entire stake to two entities.

He sold a 29.5% stake of Dukang Distillers to Treasure Winner Holdings Ltd for S$111.7 mln, and the remaining 14.34% stake to Kaifeng Tian Feng Mills for S$54.3 mln.

Who are these two parties?

Treasure Winner Holdings Ltd is wholly-owned by Wang Peng.

According to a recent report of NextInsight, Mr Wang Peng is none other than the deputy executive chairman and CEO of SGX-listed Synear Food Holdings Ltd.

Interestingly, Synear Food Holdings Ltd is located in Zhengzhou City of the Henan province – the same province where Dukang's production facilities are located.

Last week, the shareholders of Synear Holdings Ltd approved its voluntary delisting.

According to the Singapore code of takeovers and mergers, a mandatory open offer is to be made if any person, or persons acting in concert, acquire more than a 30% stake in a company.

In this case, Mr Wang Peng need not bring a mandatory open offer for the existing shareholders of Dukang Distillers.

But that depends on whether he is acting in concert with Kaifeng Tian Feng Mills.

The announcement says Mr Dou Wu is a 20% shareholder of Kaifeng Tian Feng Mills.

Mysteriously, the announcement doesn't reveal the remaining 80% shareholder(s) of Kaifeng Tian Feng Mills.

Also, we don't know the place of incorporation of Kaifeng Tian Feng Mills and whether it is a private company or a public company.

So, we have no way of knowing whether or not Mr Wang Peng and Kaifeng Tian Feng Mills are actually related.

If yes, it seems obvious they would have triggered an open offer as per the Singapore code of takeovers and mergers?

If no, then the next question will be easy to answer:


(Total:16 questions)

We have sent these questions to the company's PR firm, Financial PR, to invite Dukang for an on-camera interview, and/or seek their written response.

We were asked to submit our questions in Chinese, otherwise management would not be able to answer.

As the account director managing Dukang at Financial PR used to work for Dukang directly, we deduced that he is bilingual and therefore left it to him to translate the questions.

Despite further emails, we have not heard back since then.

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