TRUMP Dragon Distillers Holdings is banking on its two target companies for sales generation in the next five years.

The group plans to raise the combined sales of Ruyang Dukang Distillers Group and Yichuan Dukang Distillers Group by more than eight-fold over the period.

'Within five years, the sales of the two firms will drive the majority of group sales,' said group deputy chairman and joint-chief executive Zhou Tao in a recent interview with The Business Times.

For the year ended June 30, Trump Dragon was hit by cold consumer sentiment, with net profit slipping 25.5 per cent from the preceding year to 104.9 million yuan (S$22.4 million) as sales dipped and margins were squeezed by a change in sales mix to more affordably priced products.

The group recently entered into memoranda of understanding (MOUs) to acquire the two companies for up to 607 million yuan. It will be partially funded by 145 million yuan of proceeds from the group's initial public offering last year, a proposed issue of convertible bonds (CBs) worth 200 million yuan and external financing.

Ruyang Dukang is a distressed asset put up for auction by the Henan government in June 2008, while Yichuan Dukang went broke in 2004 before it was restructured and privatised.

However, both currently have a total production capacity of 90,000 tonnes of baijiu annually and 15,000 tonnes of grain alcohol and have been generating sales this year.

If this deal comes to fruition, Trump Dragon is on its way to becoming one of the leading national brands for baijiu (Chinese distilled alcoholic beverage). Most of the sales of products under its signature Siwu brand are currently sold within Henan.

This proposed transaction also follows the settlement of a long drawn-out legal tussle that lasted two decades between Yichuan Dukang and Ruyang Dukang over the use of the Dukang trademark.

Yichuan Dukang, however, was accorded 'national renowned brand' by the Chinese government.

The brand name, Dukang, is an established household name for baijiu in China with a long heritage - cited by famous poets and personalities, including Cao Cao, a central figure in the Three Kingdom period.

The acquisition is scheduled to be completed by the end of March next year and the two companies are expected to start contributing to Trump Dragon's financials from fiscal year 2011 ending June 30.

Trump Dragon's financial controller Jason Chan said he expects the payback period to take five years.

Since this acquisition will raise Trump Dragon's production capacity by five fold for grain alcohol and about two fold for baijiu, the group's original plans for organic expansion as stated in the group's IPO prospectus last year will be canned.

The transaction will also remove the need for the group to buy grain alcohol - an important ingredient of baijiu - from external sources. This will result in greater control of quality over the group's baijiu products, Mr Zhou said.

The baijiu market in China is currently a fragmented and competitive one, with some 8,000 baijiu firms in China generating about 100 billion yuan in sales yearly.

About 200-300 of them are situated in the Henan province, where Trump Dragon is estimated to account for about five to six per cent of the market share.