Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


Treasury Wine learns to live without China

Lewis Jackson  |  01 Oct 2021Text size  Decrease  Increase  |  
Email to Friend

A year after tariffs shut the door on Chinese markets, Aussie winemaker Treasury Wine Estates’ pivot to the US is bearing fruit, demonstrating that businesses can learn to live without Chinese markets.

TWE’s earnings in mainland China fell $77.3 million for FY 2021 after China’s Ministry of Commerce slapped a 175.6% tariff on Australian wine. But a pivot to other markets like the Americas, where earnings grew 23%, helped keep overall earnings for FY 2021 flat at $510 million.

The shift was greased by the popularity of high-demand premium brands like Penfolds, says Morningstar equity analyst Angus Hewitt. The vanguard for Treasury’s China strategy, these premium brands have been redeployed to other markets.

“These alternative markets have been starved of high-end Penfolds product under the company’s strategy to limit global production,” he says.

The contribution of Asian markets to total earnings fell 5% to 37% in FY 2021. Australia and the Americas grew their contribution by 2% and 4%, respectively.

Work began after tariffs were imposed last November. This year the winemaker sold four lower-tier US brands for US$100 million. As part of its Investor Day, the company presented its new operating model, talking up US markets and its highly profitable premium brands like Penfolds.

Treasury has notched early successes thanks to the popularity of new premium labels like the Snoop Dogg fronted “19 Crimes” in the US. Margins were up 4.2% as prestige brands took centre stage.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

“They’re trying to pivot to higher end wines and not be super reliant on the growth story of one country, which has burnt them,” says Hewitt.

The loss of Chinese markets, which accounted for 30% of earnings in FY2020, was painful. Beyond the immediate hit to earnings, the winemaker is locked out of the demographic growth story that has drawn so many companies to the world’s most populous nation.

In its 2019 annual report, the company had outlined a three-pronged model for targeting the Chinese market, with 40 “priority” cities flagged.

“The growth story for them disappeared overnight. It’s not so much the volume they lost, it’s the potential volume they lost,” says Hewitt.

Hewitt expects the shift to high-end wines and a wider spread of markets will help long term profits, but it’s not enough to earn the winemaker an economic moat in the highly competitive wine industry.

No-moat Treasury Wine Estates closed Friday at $12.37, slightly above the fair value estimate of $11.50.

Sanctioned Aussie exports find new homes

Wine was only one of several Australian exports to bounce back after being slapped with Chinese tariffs.

In late 2020, China imposed tariffs or other restrictions on Australian products ranging from barley to coal.

Most impacted exports found new homes outside China, says Stephen Kirchner, director of the international economy program at the United States Studies Centre at the University of Sydney.

“The general story is similar to wine. Mostly we’ve been able to divert to other markets and the impact has been small.”

Barley producers found new markets in the Middle East and South Asia, while coal exports were rerouted to India, Japan and Korea.

The resilience of Australian exporters comes at a time when tensions are again rising between Beijing and Canberra.

In September, Australia signed up for at least eight nuclear submarines as part of a new defence agreement with the US and UK. China condemned the deal as “extremely irresponsible”.

Iron ore could in the crosshairs if China were to turn to tariffs again, says Kirchner. The crown jewel of Australian exports, it makes up half the trade surplus, with the majority destined for China.

“I wouldn’t be surprised if they hit us on the margin with iron ore,” he says.

Its low cost and importance—about 60% of Chinese iron ore imports are Australian—have kept it off the table so far. Kirchner says Beijing’s crackdown on its technology sector demonstrates a willingness to inflict economic pain for political ends.

But he’s confident Australian iron ore could find a new home in the event of Chinese tariffs. Where Treasury Wine led, iron ore could follow.

“It highlights the long run ineffectiveness of China’s economic statecraft. It paints China as unreliable and encourages the diversification which undermines the tool itself,” he says.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend