Dukang Distillers – Price Range-Bound Since November 2012

I have previously written on Dukang Distillers Holdings (Dukang) two months ago citing that Dukang is still growing despite industry headwinds (See http://ernestlim15.blogspot.sg/2013/02/dukang-distillers-still-growing-despite.html ). Since then, Dukang reported a good set of 2Q13 results. 2Q13 revenue and net profit rose 37 percent and 52 percent year-on-year to Rmb738 million and Rmb144 million respectively. 1H13 revenue and net profit were Rmb1.14 billion and Rmb208 million respectively. It is noteworthy that 1H13 earnings were almost on par with their full year FY12 results. Dukang’s share price briefly saw a pop upon results (it closed at $0.31 before results) and went to an intraday high of $0.36 on 26 February before closing at $0.33 on 12 April, last Friday. With the share price being range bound since November 2012, is this a sign that smart money is not keen in Dukang, or are they merely taking their time to accumulate this stock?

Some Interesting Points To Note

Undemanding Valuations

Dukang trades at the historical price to earnings ratio (PE) and price to book value ratios of 4.5x and 0.76x respectively. There is no forward PE as there is no rated analyst coverage. As mentioned above, 1H13 earnings were already almost on par with their full year FY12 results. Based on historical pattern, the upcoming 3Q is likely to be a seasonally strong quarter (However, do see Noteworthy point 2 below.) It should be reasonable to assume that FY13 PE should be 4x or lower. According to Bloomberg, its peers are trading at an average 13.2x FY13 PE.

Table 1: Dukang’s Valuations Vis-à-Vis Its Peers

No Rated Analyst Coverage – A Double-Edged Sword

Similar to GuocoLeisure, there is no rated analyst coverage for Dukang at this time. The drawback to this is that investors and fund managers are still not familiar with Dukang’s business and prospects, thus it may take some time for Mr Market to understand it. Conversely, investors who understand and believe Dukang’s prospects now can purchase it with a considerable margin of safety. On the investor relation aspect, Dukang has been working hard to engage the investment community by hosting analyst and fund manager visits over to their production sites in China.

Backed By $0.168 Net Cash Per Share

Dukang has about Rmb731 million of cash on their balance sheet. Netting off loans, Dukang has about Rmb671 million or about $0.168 net cash per share.

Technical Charts Are Interesting

It has been trading between $0.305 to $0.36 since November 2012. At the closing price of $0.33 on last Friday, it is at the middle tier of the range. If there is a bullish breakout, either precipitated by a rated analyst report or good 3Q results or any other positive announcement, the measured target price is likely to be around $0.40. (See Chart 1)

Chart 1: Dukang Traded Between A Range Of $0.305 To $0.36 Since November 2012

Source: CIMB itrade complimentary chart (12 April 2013)

Some Noteworthy Points That Investors Should Be Aware Of

Industry Headwinds

As mentioned in my previous write-up, the ongoing government regulatory concerns pose major headwinds to the industry. Although Dukang mentioned during their 2Q13 results that it was not much impacted by the current policies and the recent decline in the first tier baijiu brands is likely to have a positive impact on them, it remains to be seen as the effects of China’s regulations may take some time to materialise. A good gauge may be their 3Q13 results and the outlook on their business going forward. Furthermore, it is noteworthy that any new measures from the Chinese leaders would pose risks to the industry as a whole.

Relocation Of Siwu Likely To Affect Siwu Sales But Effect Is One Off

In order to streamline their business, increase efficiency and cuts costs, Dukang had relocated the production of “Siwu” (四五) baijiu products from Henan Siwu’s production premises at Henan, Zhoukou City to the group’s production premises at Henan, Luoyang City where “Dukang” (杜康) baijiu products are being produced. As a result of this relocation, Siwu’s production was affected during that time. However, the effect is one off and relocation and integration were completed on 21 January 2013. (While this may affect its 3Q13 Siwu sales, the decline is likely to be offset by the rise in Dukang brand products.)

Conclusion – Continued Results And Business Outperformance Likely To Be The Catalysts

Investors would be watching Dukang’s upcoming results, business execution amid the government regulatory concerns and their outlook on their baijiu business. If Dukang can consistently deliver, it may not be long before investors warm up to the stock.

Readers can refer to my previous writeup on Dukang (link above) for more information. If you are interested to know more about Dukang, you can drop me an email at crclk@yahoo.com.sg and I will send you the latest unrated analyst report.

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