Treasury Wine Estates awaits wind back of China export tariffs


While China’s tariffs hit Treasury hard two years ago, stock markets are now speculating those duties could be wound back next year.
Winery in regional New South Wales. (Photo by: Martin Berry/Loop Images/Universal Images Group via Getty Images)
Winery in regional New South Wales. | Photo by: Martin Berry/Loop Images/Universal Images Group via Getty Images

Shares in Australia’s biggest wine company Treasury Wine Estates have rebounded strongly on speculation that wine exports could resume to China earlier than expected as Australia’s relations with China thaw under the Albanese Government.

Treasury Wine Estates has been one of the best blue-chip performers on the ASX this year after being one of the worst corporate casualties of friction with China in 2020. Beijing began an anti-dumping probe into Australian wine imports in 2020 and that concluded with China slapping a combined anti-dumping and countervailing duty rate of 175.6% on Treasury’s Australian country of origin wine in containers of two litres or less imported into China – that is, all bottled wine sold in China.  Treasury produces some of the nation’s biggest wine export brands including Lindeman’s, Penfolds and Wolf Blass.

While China’s tariffs hit Treasury hard two years ago, stock markets are now speculating those duties could be wound back next year which given better political relations between China and Australia. Since the change of federal government in Australia in May, there has been increasing communication between the two countries, culminating in a meeting between the Chinese leader Xi Jinping and Australian Prime Minister Anthony Albanese earlier this month at the G20 summit, the first official meeting since 2016. 

On that better mood, Treasury has gained around 7% over the past month, and around 14% over the past year compared to a fall of around 4% for the S&P/ASX 200. This represents a sharp turnaround from November 2020 when its shares fell from a record high of $19 to a low of just below $9 in response to China’s wine duties. 

Awaiting WTO appeal

While Australia has objected to the duties imposed on wine tariffs to the World Trade Organisation (WTO) in 2021, the WTO is not expected to issue a final decision to the parties before mid-2023. But it is possible that the WTO panel might find in favour of Australia, according to Ron Sargeant, investment analyst with Touchstone Asset Management.

“It is also clear that bilateral relations between Australia and China have improved following a change a government in Australia. Australia has been clear that it is open to compromise,” says Sargeant.

TWE ASX share price chart YTD
Source: on 9/12/22 at 3.22pm AEDT

“It would seem that it is in China’s interest to ensure that it has better coal supply. Barley and meat are also important. If there is progress made in these industries regarding trade relations that would be a solid indicator that wine tariffs may be wound back.

“China, I think, would rather compromise before having a decision made against them by the WTO. I would caution, however, that the WTO appeals process is complicated to say the least.”

Treasury Wine Estates Chinese wine segment was valued by analysts at around $4 to $5 per share before the tariffs, notes Sargeant. “If China trade did re-open it would create significant scarcity of Penfolds product, in particular, which would be meaningful for TWE’s profitability and growth potential.”

‘Well-managed’ company trades out of crisis

Since its 2022 lows, Treasury has successfully worked on selling its wine in other export markets. Treasury is hoping that a new strategy to produce wine in China and sell it in France and the US will help to rebuild its Chinese business. Last month, the company launched a new China-made red blend priced at 228 yuan a bottle aimed at urban, Gen-Z consumers in China, branded “One by Penfolds”.

According to Morgans analyst Belinda Moore, the foundations are now in place for Treasury to deliver strong double-digit earnings growth from 2022-23. “Pleasingly, the benefits of its new divisional model are clearly evident and the Penfolds reallocation strategy has been a success,” she said in a research report, referring to Treasury expanding exports in the US, Europe and elsewhere in Asia.

“Treasury has initiatives in place to deliver strong earnings growth out to 2024-25,” she notes, with a target price of $15.71 on its shares.  The stock is trading on “at a discount to other luxury brand owners [and] we remain buyers of this well-managed company.”

Treasury recently reported strong growth across its key premium and luxury in the first quarter of 2022-23 with its earnings before interest and tax rising 27% in the first quarter to $79.6 million and its margins widening by 2.5 percentage points, highlighting its increasing profitability, despite rising cost pressures. To enhance capacity in its French wine portfolio, the company recently announced the majority purchase of Chateau Lanessan in Bordeaux in August 2022.

Some other analysts are also upbeat, including Goldman Sachs. “With proven redirection of Penfolds China volumes as well as refocusing Treasury Americas on premium/luxury, Treasury is now re-entering a growth phase with a more diverse and defensive business,” the investment bank said in a research note. Like Morgans, Goldman Sachs has a buy rating on Treasury Wine.

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