Treasury Wine Estates shrugs as China doubles down on sanctions
The Aussie winemaker is well on the way to moving on.
Mentioned: Treasury Wine Estates Ltd (TWE)
China looks set to padlock the door it shut on many Australian exports in 2020.
Hopes for a quick resolution to the raft of tariffs imposed in 2020 were dashed last Wednesday after senior Chinese official Wang Wenbin called the sanctions “legitimate, lawful and beyond reproach”. But the continuation of China’s 176% tariff on Australian-made wine poses no major issue for local winemaker Treasury Wine Estate (ASX: TWE), says Morningstar equity analyst Angus Hewitt.
The Australian winemaker has operated as if wine tariffs would stick and refocused its mainland China sales to French and American made wines as well as luxury brands like Penfolds where consumers won’t balk at higher prices, says Hewitt. Treasury is also aggressively expanding into other countries.
“While this means Treasury Wine Estates’ door to the lucrative Chinese market remains effectively shut, it’s business as usual for Treasury, and we retain our AUD $11.50 fair value estimate,” says Hewitt.
“We expect the firm’s strategic shift to focus on high-end wines and increase geographic diversification to benefit both long-term revenue growth and profitability,” he added.
Investors took the harsh rhetoric in stride. The three-star stock closed on Wednesday at $11.35, up 4.13% since the Chinese Foreign Ministry press conference last week, versus 0.9% for the broader market.
China and Australia have been embroiled in a trade dispute since 2020. China slapped tariffs on Australian barley, coal and lobster among other goods in response to Australia’s push for an independent investigation into the origins of Covid-19. Attempts to repair the relationship are faltering and Prime Minister Anthony Albanese has called for an end to China's “unjust” trade sanctions as a precondition to improved relations.
In a sign of simmering tensions, reports emerged this month that China plans to consolidate iron ore purchases in a single body to better allow buyers to demand lower prices from Australian suppliers. Iron ore has previously escaped tariffs given its importance to China, the world's largest importer.
To date, Australian producers of sanctioned products have been mostly successful when it comes to replacing lost Chinese sales. In an interim report from February this year, Treasury reported a “significant decline in shipments to Mainland China which were partly offset by strong growth across global priority markets and channels,” with net sales revenue outside of Mainland China increasing by 49.1%.
The winemaker recorded “particularly strong” growth for premium brand Penfolds in Asian markets outside of Mainland China and a 119% increase in net sales revenue.
Sales in the United States are also growing rapidly, spearheaded by the Snoop-Dogg backed “19 crimes” wine brand with annual sales of over 5 million cases of wine.