In the course of doing business, it’s likely for many companies to encounter stumbling blocks which threaten their growth. In a dynamic capitalistic society, the fittest would prevail and companies have been known to evolve and adapt in order to survive and stay relevant.
Some companies even make the drastic decision to overhaul their entire core business and switch to an entirely new one, while others may add on a totally new business division to diversify their revenue streams. For such cases, should shareholders cheer or jeer? In this article, I will explore the situation with two companies: Dukang Distillers Holdings Ltd (SGX: BKV) and Serial Systems Limited (SGX: S69). The former recently switched its core business to another, and the latter recently tacked on an unrelated business.
Dukang Distillers, which changed its name from Trump Dragon Distillers Holdings Limited in 2010, is a company headquartered in Zhengzhou, China and its principal activity is the production and sale of white spirits or “baijiu,” a type of fiery liquor popular in China. The company’s products are marketed under the Dukang and Siwu brands.
On 17 November 2018, Dukang announced that it would be selling its entire liquor business and would be acquiring Xingnong Agriculture, a company established in 2009 that plants, cultivates, processes, and sells kiwifruits. Xingnong owns forestry use rights for eight plots of forest land spanning 6.5 million square metres, and its net profit after tax for the quarter ended 30 September 2018 was around S$5.3 million.
Dukang has been struggling as a baijiu manufacturer for several years, with declining revenues and mounting losses. In a profit warning released by Dukang in August 2018, it attributed its poor financial performance to a myriad of reasons, including severe air pollution, poor weather conditions, and stricter inspections and enforcement by Chinese authorities. Dukang’s share price has plunged from a high of over S$9.00 in 2011 to S$0.18 today (the company underwent a 10-for-1 share consolidation in 2015).
The jury is still out as to whether the transition to agriculture would lift the fortunes of Dukang. But at the very least, Xingnong is currently generating a profit, unlike Dukang’s baijiu business. The acquisition of Xingnong is pending approval from Dukang’s shareholders at an extraordinary general meeting that will convene in the near future.
Serial Systems was established in 1988 and has one of the largest distribution networks in Asia for a wide range of products including consumer electronics, household appliances, and industrial products.
In its latest 2018 third quarter earnings updated released on 5 November 2018, Serial Systems reported a 2% year-on-year decline in revenue to US$385.6 million and a 230% jump in net profit to US$10.3 million. But, after adjusting for an exceptional gain of US$19.7 million from the sale of an associated company, Serial Systems would have reported a loss of US$9.4 million for the quarter.
In late October 2018, Serial Systems announced that its distribution agreement with Texas Instruments would end on 30 June 2019. This distribution agreement with Texas made up 54% of Serial Systems’ revenue for the first half of 2018. So, it’s obvious that the termination of the agreement would have a huge negative impact on Serial Systems’ future business prospects.
Back in August 2017, Serial Systems announced a S$165,000 investment to acquire a 55% stake in a business venture named Musang Durian, a Malaysian company that manufactures, processes, and exports durian puree and durian-related products. Though the investment amount is small, the business of durian-related products is completely and radically different from that of electronics distribution.
Foolish Bottom Line
The common theme between Dukang and Serial Systems is that both are facing challenges to their businesses, which may be the reason why they had decided to take a radically new path from their current core businesses. Investors should be wary though, as there is no guarantee that forays into new areas would work out well. An attempt to diversify or to enter a totally new line of business may backfire badly if the company’s management team does not have the competence to manage it well.
Worried about the overall state of the market? Do you know the 1 thing you should never do in the stock market? The Motley Fool Singapore’s new e-book lays out a plan to handle market crashes, details the greatest advantage you have as an investor, and looks at decades worth of market data to bring you the smartest insights on investing. You can download the full e-book FREE of charge—Simply click here now to claim your copy.
The Motley Fool Singapore contributor Royston Yang contributed to this article. Royston does not own shares in any companies mentioned.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore writer Chong Ser Jing owns shares in Dukang Distillers.