Dukang Distillers said on Saturday that it planned to sell its baijiu Chinese spirits business — which its annual report said has an around 2,000 year history — to Keen Wind for 1.11 billion yuan, and acquire Keen Wind’s kiwifruit agriculture business for 1.11 billion yuan.
The two deals are inter-conditional and will be completed at the same time, it said.
Wang Peng indirectly owns 100 percent of Keen Wind, the filing to SGX on Saturday said. According to Dukang Distillers annual report, Wang Peng was deemed interested in the 29.50 percent of Dukang Distillers held by Treasure Winner Holdings as of 14 September.
Dukang said that in recent years, the baijiu business has been money losing amid the mainland’s emission-reduction measures as well as its austerity restrictions, adding that customer attrition rates were “high.”
Money-losing baijiu business
“Given the Dukang Group’s declining profitability and recent losses, the board undertook a strategic review of investment and divestment opportunities with a view to improve its financial position,” it said in the filing on Saturday. It added that entry into China’s kiwifruit cultivation industry would offer a steady revenue stream amid growing consumer demand for fruit on the mainland.
The company will sell all of subsidiary Sea Will International, which is an investment holding company of the Dukang Group, which mainly produces and sells baijiu products. Baijiu, also known as shaojiu, is a spirit which is distilled from wheat and sorghum.
For the full fiscal year and fiscal first quarter, Dukang Group reported net losses of 216.17 million yuan, or around S$44.60 million, and 22.95 million yuan, respectively.
The company’s shares may be suspended by the Singapore Exchange once the sale of the baijiu operations — its primary business — is completed and until Dukang can add a new business to meet listing requirements, which would be the kiwifruit operations, it said.
Acquiring the kiwifruit business
Under the agreement, Dukang Distillers will acquire all of investment holding company Great Resolute Ltd., which is incorporated in the British Virgin Islands, from Keen Wind, it said.
While currently Great Resolute has issued and paid-up share capital of US$100, before the completion of the deal, Xingnong Group will internally restructure to comprise Great Resolute and its wholly owned subsidiaries, Hong Kong-based holding company Go National and China-based Xingnong Agriculture, it said.
Xingnong Agriculture, since its formation in 2009, has primarily engaged in planting, processing and selling kiwifruits, which are also known as Chinese gooseberries, it said, adding that it holds land use rights for industrial land for its processing facility and forestry rights the land where its kiwifruit orchards are developed.
“The Xingnong acquisition will allow the company to turn around its loss-making position. This, together with the positive business outlook for the Xingnong Group, may allow the potential for growth in the market capitalisation of the company, an overall increase in investor interest and, consequently, improvement in trading liquidity in the shares,” Dukang said.
Xingnong Agriculture is currently owned by five individuals, with Wang holding around 70.27 percent of the total equity interest, it said.
Xingnong Agriculture had a book value of 158.05 million yuan, or around S$32.46 million, as of end-2017 and a net profit after tax of 17.93 million yuan for 2017, it said.
If the value of Xingnong Agriculture, defined as the average of two market values from independent valuers JLL and Roma, is less than the acquisition price, Keen Wind will pay the shortfall amount to the company in cash, Dukang Distillers said. If the shortfall is more than 10 percent of the acquisition consideration and/or the Xingnong Agriculture value is less than Dukang Group’s, this would be considered a material default by Keen Wind and the company could terminate the deal, the filing said.
Dukang will need to seek shareholder approval for both transactions, the filing said, adding that Wang Peng and his associates would be required to abstain from the voting.