21 October 2016
DCH Holdings operates an e-commerce business in the Shanghai free trade zone. Photo: HKEJ
DCH Holdings operates an e-commerce business in the Shanghai free trade zone. Photo: HKEJ

Why this DCH unit is a potential game changer

Dah Chong Hong Holdings (01828.HK) has a conservative, old-school image but its new e-commerce venture could change that.

At present, the two major businesses of the 66-year-old group — food trading and car dealership — are low-tech and lack any exciting narrative, which might explain why DCH shares have been lagging over the past year.

There is a potential game changer.

DCH Holdings set up an e-commerce business, DCHNU, in the Shanghai free trade zone last year.

The online shopping platform lets mainlanders buy imported products at prices comparable to those in Hong Kong and overseas. Also, these are subject to lower taxes and some are even tax-free.

The central government in Beijing has been dismantling tariff barriers and opening up the duty-free sector.

Last year, customs authorities and the National Development and Reform Commission co-launched a pilot program for cross-border e-commerce trading.

It is worth noting that cross-border e-commerce is not for everyone. 

Until now, there are only a few e-commerce players in the free trade zone, including industry giants Amazon and Alibaba.

So, how did a relatively small company like DCH manage to get a piece of the action?

Backing from its parent, the colossal state-owned enterprise CITIC Ltd. (00267.HK), is a big part of the reason.

There are two main types of DCHNU products — foreign-made infant formula and baby products, and healthcare products such as medicated massage oil and medicine pills. These are all popular with mainland visitors to Hong Kong.

There is also a Japanese section where customers can find electronics, food, cosmetics and fashion imported from Japan.

Earlier this year, Japan’s Itochu Corp. invested HK$40 billion (US$5.16 billion) in CITIC Ltd. to become a strategic shareholder.

The deal left many people wondering what made the two giants come together. The Japanese section in the DCHNU platform offers some clues about their synergies.

Now that DCH is a compelling story, demand for its shares is expected to pick up. The counter is traded on the Shanghai-Hong Kong stock link.

An added selling point is that DCH can serve as a hedge at a time when the number of mainland visitors to Hong Kong is falling.

At the end of the day, stocks rely on the business fundementals of the underlying asset to sustain a rally.

DCHNU has been in business for only a few months. Investors should take a hard look at its mid-year results to find out more about the new operation.

This article appeared in the Hong Kong Economic Journal on April 9. [Chinese version 中文版]

Translation by Betsy Tse

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Hong Kong Economic Journal columnist

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