What does the future hold for Treasury Wine (ASX:TWE) after China’s tariffs?

The proposal by Treasury Wine Estates Ltd (ASX: TWE) to spin off its Penfolds business was put on hold recently to allow the company to focus on responding to China’s trade tariffs and the ongoing anti-dumping probe by China into imports of Australian wine.

As tensions between Australia and China escalated, Treasury Wines responded to the tariffs at the end of November. The Treasury Wine share price then tumbled to a near 5-year low, trading at $8.40 as of 1 December.

Response to trade tariffs

 Treasury Wine’s response plan included the following key items:

• reallocation of Penfolds Bin and Icon range from China – which represent 25% of the company’s annual global Penfolds allocation volumes – to other key luxury growth markets including Asian markets outside of China, Australia, the US and the Europe.
• reallocation of luxury grape sourcing to other premium Australian portfolio brands, which have been significantly
  supply constrained over recent years.
• acceleration of its multi-country of origin portfolio growth strategy, with a focus on growing sourcing from its existing asset base in France and potentially from China.

In the week or so following the release of its response, the Treasury Wine share price has risen by 9.5% to $9.20.

International support from parliamentary leaders

More than 200 parliamentarians from 19 countries have formed an alliance called the Inter-Parliamentary Alliance on China Policy (IPAC). This is led by global legislators who are senior politicians aiming to maintain a free, open and rules-based international trade order.

The alliance recently launched a global support for the Australian wine movement in response to this wave of Australia–China trade tension, via a global campaign calling for people to drink Australian red wine in December.

Treasury to diversify away from China

A research report out of Bell Potter estimated that the tariffs from China will impact Treasury Wine’s earnings in the near term, and thus the broker lowered the company’s target share price to $8.20.

In response to the collapse in demand, Treasury CEO Tim Ford said “We are moving on with a plan…to build the markets outside of China, and that’s what we’ll continue to do.”

Bank of America analyst David Errington also noted that Treasury Wine will now be focusing on other markets, stating: “Treasury Wine will most likely divert about 1.5 million cases a year from China to other markets by 2023, and China’s earnings contribution to the company would almost halve by then.”

About the Treasury Wine share price

The Treasury Wine share price currently sits at $9.20 as of 9 December, up 9.4% from its 1 December low. Treasury Wine shares are down 43% in the year to date, leaving the company with a market capitalisation of $6.67 billion.

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Motley Fool contributor MWUaus has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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