Treasury Wine Estates (ASX:TWE): China’s 200% wine tariffs have been consigned to history, so is it now back to business as usual?

Nick Sundich Nick Sundich, April 3, 2024

Last Thursday, just before we all went on Easter holidays, Treasury Wine Estates (ASX:TWE) investors had the day they had long been waiting for. China’s 200% tariffs on Australian wine imports were scrapped after 3 and a half years. So is it now back to business as usual for one of Australia’s top wineries, and only listed wine stock?

 

Who is Treasury Wine Estates?

Treasury Wine Estates is a business that distributes Australian wines across the world, including yhe famous Penfolds portfolio. It relied on China significantly prior to the pandemic because the rise of the middle class and its spending power meant there was strong appetite for luxury items such as wine. Granted, Australia was not the only appealing wine provider, but it was advantaged compared to France or Italy given it is closer to China.

Unfortunately, tariffs implemented by the Chinese government in November 2020 ruined its business in China. We’re not talking 10-15% taxes…we’re talking 200% tariffs. Obviously this killed its business and the ideal scenario was for the tariffs to be removed. There were other markets in Asia for Australian wine, but none were as lucrative.

But last week, on March 28, just before the Easter break, Beijing announced the tariffs would be reduced to nil. So is it now back to business as usual? Not so fast.

 

Treasury Wine Estate (ASX:TWE) share price chart, log scale (Source: TradingView)

 

China will recover. But…investors need to remember two things

First, it will be slow. Second, we have only seen provisional plans for rebuilding. The company is expected provide more details before the end of June so that point will be addressed soon. It has told investors it would lift prices from July 1 and expects to begin shipping to China this week.

Back to the first point, and expanding on the second point, recovery will be slow. No one is suggesting it’d return to pre-COVID levels in a month or two, but some investors probably hope that things will get back to normal in a year or two given demand. The AFR reported that private producer Randall Wine Group for orders totalling 156,000 bottles within hours of the tariffs being lifted. At the end of the day, it is anyone’s guess, although we’d suggest even a year or two is unrealistic.

Investors should also bear in mind that there is significant competition in the market, and that the state of the Chinese economy and consumer confidence are both uncertain to investors. There will likely be more wine producers that will try and penetrate the market, and European providers will likely have taken some share.

 

Some upside, but how much?

Goldman Sachs put out a note within 24 hours of the tariffs being removed. While admitting that it was a positive catalyst and there was appetite for Penfolds to return, it may take until FY30 for sales to reach pre-COVID levels, at $400m. Nonetheless, it predicted A$120m in FY25, $160m in FY26 and FY27 in $200m. In many ways, this growth could be like the travel industry – it may take some time to reach pre-COVID levels (in fact, even longer in this case), but there would be some growth early on, and potentially more consequential for the share price than later phases of growth. TWE has been honest in that it would take some time for a recovery, forecasting modest growth for the next couple of years, but a step-up from 2026 as wine availability increases.

Goldman lifted its valuation on TWE, but only slightly. It values TWE on a blended basis – 15% on M&A, 42.5% DCF and the remainder on a SOTP basis for its portfolio. Penfolds is just over 70% of the valuation on the SOTP basis. It previously valued Penfolds at an EV/EBIT of 16x, but lifted it to 18x. This lifted it to $11.90. The DCF was $12.90 and M&A at $17.40 per share, using 29.5x P/E. This derives $13 per share, up from $12.60 per share, implying a modest return of 7% from the $12.45 per share price it closed at just prior to Easter.

 

It is good news for TWE, but does this mean it is now a buy?

We will stop short of making a judgement as to whether or not investors should buy or sell shares in Treasury Wine Estates given everything above. And we certainly won’t speculate as to whether or not other Chinese tariffs, particularly those on beef exports, will be scapped. Nonetheless, there is no denying that it is good news for the company.

 

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