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This Alcohol Distiller Is Near Its 52-Week Low: Is There An Opportunity For Investors?

dukang

In China, the government’s crackdown on corruption has been a huge blow to the hard liquor industry; it might even be fair to say that it’s been one of the worst-hit. In Singapore, it’s hard to think of a collective group of shares that are more unloved than the S-Chips, Singapore-listed companies which are based in China.

Now, imagine a S-chip share that’s part of China’s hard liquor industry.

Folks, meet Dukang Distillers Holdings (SGX: GJ8), a producer of “baijiu” (a Chinese alcohol generally distilled from grains like sorghum, rice, or wheat) in the Henan Province of China.

The company, which is dual-listed in Singapore and Taiwan, carries two established brands of baijiu with rich histories: Dukang and Siwu.

Over the past 1 year, Dukang’s share price has fallen steadily from a high of S$0.56 to S$0.20 currently. That is just slightly above Dukang’s 52-week low of S$0.19. In fact, the last time Dukang was trading at such a low price was during the depths of the Global Financial Crisis of 2008-09.

If we take a look at Dukang’s corporate performance – which has not been good – its share price history over the last 12 months would not be much of a surprise. For instance, sales have declined by 35.8% year-on-year for the first nine months of the financial year ended 30 June 2014. Meanwhile, the company’s profit has been slashed by 85%.

Management has blamed such lacklustre figures mainly on the anti-corruption campaign happening in China which has led to a sharp decrease in government spending on banquets and receptions, in turn naturally leading to less consumption of hard liquor. To add fuel to fire, the Chinese Central Government has also issued a complete ban on upscale liquor in all government functions. Such developments have affected all producers of high-end liquor in China, Dukang included.

Is this the new normal?

Judging from the huge drop in sales, it can be inferred that Dukang derives a huge portion of its revenue from the government in China. As the Chinese government tries to tighten its enforcement on corruption, Dukang might have to come to terms with this new reality of much lower sales from the government sector going forward.

Is there hope?

It seems that Dukang’s previous market (government functions and government-related banquets and receptions) is now more or less gone and the company needs to search for new markets. In light of that, the company is trying to focus more on lower priced baijiu products. Although the margins for such products are lower, sufficient top-line growth (if it happens), could still bring the company back on its feet.

Foolish Summary

With Dukang facing a structural change in its business model, investors might really need to consider the inherent risks involved before making any investment decision.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.