March 2013 Question and Answers (via e-mail) with Dukang's Corporate and IR manager (Mr Ngo Yit Sung)
1. The first of the 3 Dukang's growth strategies is to enhance brand value.
Q: How do you currently differentiate your Dukang's brand against products from another company that also uses Dukang's name and states the same Cao Cao quote in their promotion (for example: Baishui Du Kang from Shaanxi Dukang Liquor Group) ?
A: To clarify, the Baishui Dukang brand is owned by Shaanxi Dukang Liquor Group. Prior to our acquisition of Luoyang Dukang Holdings Limited, there are 3 Dukang distilleries, namely Ruyang Dukang, Yichuan Dukang and Baishui Dukang. These 3 entities were set up before China enacts its Trademark Act, hence the confusion today.
We currently controlled Luoyang Dukang, which consists of Ruyang Dukang and Yichuan Dukang and we own the Dukang trademark. Bashui Dukang was established with the logic that Du Kang, the inventor of baijiu, was born in Baishui District, Shaanxi. The truth is, Du Kang discovered the baijiu making technique in Ruyang District, Henan. Relics such as the Du Kang manor, Du Kang tomb, the well Du Kang drew water to make baijiu are located beside our Ruyang plant and is currently managed by us.
In terms of branding, we position the Dukang brand to target the premium markets, because as the ancestors of baijiu, if there is any brand who can rival the lights of superbrands like Moutai and Wuliangye, it is Dukang. Whereas Baishui Dukang brand is targeting the mid to mass end market. They have another brand named 13 Dynasty which is position to target the premium markets.
However, it is known in the market and by consumers that Baishui Dukang is an imitation of the Dukang brand. This is why when we ramped up Dukang's sales from <RMB300mil before the acquisition till last financial year of RMB 1.1 billion, Baishui Dukang's sales is still languishing at <RMB100mil. Also, previously you will find Baishui Dukang products alongside Dukang's product in Henan, but today you don't see it anymore.Together with the help of the local authority, we have successfully made Baishui Dukang retreat from the Henan market.
2. Different fragrance types of baijiu. Thick fragrance dominates 75% of the market.
Q: Is Dukang only producing thick fragrance baijiu?
A: Yes, both our Siwu brand and Dukang brand are thick fragrance type.
Q: Is the sales growth number for all the three types the same?
A: You may say so as the ratio has been quite stable over the years.
Q: Does thick fragrance dominate baijiu market in every province?
A: Not really, for example in Kweichow Province, sauce fragrance dominates.
3. International sales: Letter of Intent with Lotte Chilsung, MoU with Taiwan Tobacco and Liquor, Accreditation of Sino-Japanese Friendship Partnership Award
Q: Could you give more update on international sales (numbers, percentage growth) ?
A: No further update after the LOI.
Q: Is it possible to get domestic sales vs international sales breakdown?
A: We haven't really started selling internationally, the focus is still the baijiu market in China. If you're talking about Henan Province versus other Provinces in China, the sales breakdown is 75% in Henan, 25% across China.
4. Chairman statement in 2012 Annual report: Dukang has achieved a first place position in terms of market share in Henan province.
Q: Could you please share the resource (survey, news articles, etc) to back the statement?
A: This is based on market intelligence. Previously the leading Henan baijiu producer is called Songhe, a non-listed entity which Goldman Sachs acquired a stake in. I remember there is an article on this. From unofficial data, our Dukang sales in 2012 has exceeded that of Songhe's.
5. Baijiu quality from newer fermentation pool.
Q: Since higher quality baijiu comes from older fermentation pool, how do you maintain baijiu quality with the newer dug fermentation pool?
A: We can cultivate the fermentation mud from the old pool and transplant to the new pool.
6. Capacity and Utilisation
Q: Since 3Q12, output has always been greater than capacity, could you please explain how to achieve it?
A: Since the production of the grain alcohol is not a scientific process, the capacity is an average number and the distillation output depends on the water content of the grains, humidity of the atmosphere. So sometimes we get more than 100% utilization. Also, we will consistently improve out fermentation technique to yield more grain alcohol per pool. If this situation persist, we will revise the capacity accordingly.
7. IPO prospectus: Trump Dragon has 68 types of baijiu. 2012 Annual Report cover statement: Transcending beyond traditional brews.
Q: How many types of Baijiu are you producing now? (categorized by Dukang premium, Dukang regular, Siwu premium, Siwu regular)?
A: We have about 100+ each for Dukang and Siwu. The number of products varies year-on-year as we launch or phase out products.
Q: When and Where are Dukang planning to launch the non-traditional brew (sake?)
A: We actually intend to launch the sake product end of last year but due to the China-Japan dispute on the Diaoyu island, it may not seem to be a good idea to sell sake in China. We will update as and when there are new developments.
Again, we would like to emphasize that the focus of the Group is in the baijiu market in China. It is a huge market to tap.
8. Sales through flagship stores.
Q: Are the flagship stores owned by Dukang?
A: No, they are owned by our distributors.
Q: If the flagship store is owned by third party, does Dukang provide special subsidy to them?
9. Declining Siwu sales.
Q: Could you please share a bit what is management plan to rejuvenate Siwu Sales, aside from distributors restructuring which was done recently? (for example: new blending formula? new advertising? )
A: Siwu's business will largely be stable with marginal increase or decline y-o-y. Reason being, most of our resources are focusing to grow Dukang. Nonethelss, when the time is ripe, Siwu will be able to leverage on Dukang's distributor network and expand its sales.
10. Dukang will commit 400 million yuan advertising cost for national market in 2013
Q: How do you differentiate your marketing against competitor with deeper pockets (for example: Kweichow Moutai or Diageo which owns Shui Jing Fang) ?
A: Other than creating brand awareness, what is most important is to ensure quality of the products. And also we are cheaper than them. In our advertising, we focus on emphasizing the rich heritage and culture of the brand, and highlight that we are the ancestor of all baijiu.
Q: How do you split the marketing cost between the need to maintain leadership in Henan, expand to neighbouring province/key markets, and build national brand awareness?
A: Actually we don't really differentiate that way as we are advertising on national channels like CCTV
Q: What is the average length of land-lease?
A: commercial land lease is 50 yrs
Q: Is fermentation pool dug at leased land?
Q: Is there risk that fermentation pool dug at land where the lease can not be extended?
A: No, as we contribute substantially to the local government's tax revenue, also the local authority are more than willing to help us to grow and flourish.
12. Ms Ma Ke cessation as executive director of finance.
Q: Will there be any replacement for Ms Ma Ke to take care of her responsibility for overseeing daily finance and accounting operations?
A: It will be taken care by our CFO and our CFO will now report directly to the CEO, Mr Zhou Tao.
13. Possible supplier concentration.
Q: Is there any of your supplier that supplies more than 10% of your raw material needs?
A: Yes, but we have many sources such that if A is not able to supply, we can get from B and C. The prepayment arrangement is actually there to help us secure consistent supply of raw material at a certain pricing throughout the year. But still when making purchase, we will still compare prices among different suppliers.
14. Current policy of providing no impairment to trade receivables
Q: Other alcoholic producers (for example: Thai Beverage, Diageo) provide allowance for doubtful trade receivables account but you are not, why are you confident about not having to write down any bad debt in the future?
A: For Dukang brand of products, we only accept cash terms. We extend credit terms to Siwu's distributors. We have worked with trusted partners over the years and have never encounter any bad debt from Siwu's distributors. In fact, during bad times, Siwu will sell better as it is more economical.
15. Relation with Synear Food.
Q: Does Dukang have any relation with Mr Li Wei, chairman of the Board of Synear Food?
A: No, but our Chairman and Mr Li are close friends. They are both the alumni of Zhengzhou university. Also, Mr Li being the senior, introduced us to list in Singapore as Synear was already listed on SGX-Mainboard.
16. English website
Q: When are you going to establish English version of Dukang's corporate website for non chinese speaking investors?
A: No plans in the pipeline yet.