“何以解忧， 唯有杜康”– 曹操

A new player in China baijiu market. We visited Dukang’s production plant in Luoyang where we were introduced the production process of baijiu, the Chinese national liquor. During the trip, we also learnt some history of baijiu and the “Dukang” brand. Dukang brand is named after the inventor of baijiu, which holds a special position in Chinese culture. Although being a new player in China baijiu market, Dukang has achieved quite impressive progress in the past two years and has gradually become the No.1 Henan home-grown brand.

Gradually gaining market share in Henan province. There used to be two factories in Henan province that claimed the right to use the Dukang brand. Since the merger of the two Dukang brands in 2010, Dukang has increased its market share in Henan to around 3%. Management is targeting a market share of 10% by way of capacity expansion, distribution network development and marketing efforts.

Strong market presence and government support. Dukang has a strong market presence in the key cities of Henan and enjoys strong support from local government. We observed that Dukang’s products occupied a large amount of retail shelf space at hypermarts, and were aggressively marketed as a top home-grown brand. Henan government also seems quite supportive to Dukang and has played a prominent role in promoting this brand.

Regulatory risk is the key right now. We think the biggest risk for Dukang is that downward pressure on price and consumption of premium baijiu brands, such as Moutai and Wuliangye, due to the restriction on luxury baijiu consumption by government and army officials might pass down to mid-end brands in the future.

Could potentially worth more. Dukang’s current valuation of 4.4x 12m trailing PER and 0.6x PB is quite attractive when compared with its Ashare listed peers. The undemanding valuation is perhaps due to the low brand recognition and poor acceptance by overseas investors. We bring investors attention to this company because we think further enhancement in the brand value would probably narrow the valuation gap between Dukang and other top brands. The rich cultural heritage within Dukang name could also makes it attractive for acquisition.

Source: Maybank Kim Eng Research - 25 Mar 2013