When Dukang Distillers Holdings, the producer of baijiu or Chinese liquor languishing on the Singapore Exchange Watchlist, decided to exit the business, it looked at one involving the humble Kiwifruit as replacement.

Despite its premium positioning among fruits, demand for kiwifruit has been growing over the years in China. Also known as Chinese gooseberry or monkey peach, the kiwifruit is high in vitamin C and dietary fibres and Chinese consumers have just been made aware of its health benefits, making them one of the largest consumers globally.

In fact, China is now the largest market for the renowned New Zealand kiwifruit brand Zespri, with China contributing 30% of global sales. In 2021, Zespri achieved record-high sales in China of over 70 million boxes.

David Zhao, executive director of China Shenshan Orchard, tells The Edge Singapore that the fresh fruit business is one with a “brighter future” and is more profitable as profit margins are at least 50%. And kiwifruits are hardy fruits with a longer shelf life compared to other fruits. “The kiwifruit can be stored in our cold rooms for up to six months while it can stay fresh for one month under room temperature. It also is quite easy to handle,” says Zhao.

On the other hand, although China’s alcohol market enjoyed boisterous growth for years, a growing number of consumers have become more health-conscious and the sale of alcohol products has been declining globally.

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In its last 1HFY2020 ended December 2020, just before the restructuring, Dukang saw revenue fall 10.6% to RMB40.5 million from a year ago. It also suffered a loss of RMB33.4 million, although this was 6.6% smaller than a year ago.

In its results announcement, Dukang attributed its lacklustre results to “a drastic change in consumers’ consumption habits and spending patterns on discretionary consumer goods” as a result of the Covid-19 pandemic which also disrupted the sale of baijiu.

In November 2018, Dukang disposed of its baijiu business and acquired Great Resolute in a transaction totalling RMB1.11 billion. Incorporated in the same year, Great Resolute is an investment holding company with a paid-up capital of US$100 and through a subsidiary owns the kiwi cultivation business Xingnong Agriculture.

After Dukang’s baijiu business has been privatised, China Shenshan Orchard will operate the kiwifruit cultivation business in China through its 100%-owned subsidiary, Xingnong Company. Dukang will also change its name to China Shenshan Orchard.

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New business bearing fruit

In its first 18-month period from July 1, 2020, to Dec 31, 2021, which represents China Shenshan Orchard’s FY2021 results, the company recorded earnings of RMB92.2 million ($19.14 million), reversing from a loss of RMB73.9 million in the same period a year ago. The company’s FY2021 has 18 months as it is changing the end of its financial year to Dec 31 from June 30 previously.

Revenue for the period came in at RMB111.1 million from the sales of about 3.8 million kg of kiwifruits at an average selling price of RMB29.5 per kg to food and fruits distributors, corporate distributors and corporate customers in China. Consequently, the company registered an adjusted gross profit of RMB105.6 million and an adjusted gross profit margin of 95.0%.

Raymond Ho, CFO of China Shenshan Orchard, says that one of the main goals of the company now is to exit the SGX Watchlist. “We have tackled a key obstacle, which is to be profitable and now we have to slowly focus on maintaining a good performance to enhance value and allow profits to grow. With that, I aim for the company to get its market capitalisation up to over $40 million by the end of this year.”

Year to date, the company’s share price has gained more than a third to close at 38 cents on May 18, giving it a market value of $30.0 million.

In its results announcement, Hu Chao, executive director and CEO of China Shenshan Orchard, says, “The kiwifruit industry in China is experiencing rapid growth and demonstrating bright prospects which are fuelled by rising disposable income as well as burgeoning domestic consumer demand for premium-quality kiwifruits. Thus, the company will continue to focus on strengthening its presence in China’s domestic market and expanding its market share in the premium kiwifruit market segment.”

The company intends to continue investing in its research and development to cultivate premium-grade varieties while modernising and digitalising its agriculture infrastructure and core processes as part of its ongoing innovative efforts and initiatives to expand its market share in China’s kiwifruit industry. Additionally, the company will also invest in its branding and marketing development to unlock greater demand for its products.

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Currently, China Shenshan Orchard holds 83 trademarks and 56 patents for grafting and harvesting methods and devices such as fertilisation mechanism and windproof device for kiwifruit planting, artificial pollination device, cutting device for grafting branches of fruit trees and more. With its technology and patented methods, the company has developed over 60 kiwifruit varieties and has been granted six premium kiwifruit variety rights.

However, Ho explains that due to the nature of the company’s business, revenue recognition will be rather lumpy for the company. “You have to understand the nature of our business and for those like us in the agriculture industry, it is common for cash flow to not come in every day,” he explains.

The company will only recognise revenue once the fruits have been harvested. And in this case, Zhao elaborates that the kiwifruit harvesting season in China typically starts sometime in September and goes on for several months, depending on the weather.

Sale channels and plantations

China Shenshan Orchards’ kiwifruits are sold through three primary channels — distributorship, wholesale and e-commerce platforms. Although wholesaling commands the lion’s share of the sales channel, the company is currently looking at expanding its e-commerce sales channel, says Zhao. “Although the percentage of our sales via e-commerce is merely 5%, we think it has a lot of potential for future growth,” he adds.

Currently, the company sells their kiwifruits on major e-commerce platforms such as Tmall, Taobao and JD.com. Despite the direct selling model, Zhao clarifies that the profit margin from e-commerce is similar to its other sales channels as it is offset by advertisements and promotional expenses on the respective e-commerce platforms. The marketing spend, according to Zhao, is necessary so that the brand of the company can stand out from the competition.

In FY2021, China Shenshan Orchard’s selling and distribution expenses stood at RMB4.6 million, mainly for advertising and promotional expenses as well as sales and marketing activities. One of its primary focuses is to build the brand and enhance its marketing efforts — both offline and online — to become a household name, says Zhao.

In addition, the company is also looking to boost its production level. This is done via a two-pronged strategy of jointly developing farmlands with landowners as well as engaging smallholder farmers to provide contract farming services.

For instance, its wholly-owned subsidiary Chibi Shenshan Xingnong Agriculture Technology entered into a 30-year agreement with Chibi Green Industry Development Investment on July 5, 2021, to jointly develop a land area spanning up to 333ha land in Chibi City for kiwifruit planting and cultivation. Chibi Green will provide RMB150 million investment while Chibi Shenshan is responsible to develop and operate the plantation.

Next year, China Shenshan Orchard is looking to further expand its engagement with smallholder farmers as it could rapidly increase the company’s production volume. “In China, we can supply our technologies and teach our management skills to so many smallholder farmers. We also acquire the qualified fruits they harvest at a greater price compared to the variety they grow by themselves. Hence, the farmers are able to see the benefits of cooperating with us,” says Zhao. Currently, the company holds the forest use rights for eight orchards, spanning a total land area of some 653ha.

Due to its focus on increasing its kiwifruit production and promotional efforts, the company will not expand its products to include other fruits or look to introduce downstream products such as processed fruit products shortly. “China’s kiwifruit business is growing very fast and big — our production volume is only a tiny part of it. There is a lot more room for our business to grow. We will consider exporting our kiwifruits outside of China depending on the outcome of our production expansion efforts,” says Zhao.

Looking ahead, Zhao also intends to leverage the company’s more than 10 years of expertise and technical knowledge in the kiwifruit cultivation business and offer consulting services to other farmers soon. Perhaps, this could bring in additional revenue to offset its lumpy revenue recognition.

Dukang Distillers morphs into kiwifruit producer China Shenshan Orchard

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