Treasury Wine Estates Ltd (ASX: TWE) shares will be under scrutiny today after the business responded to the Chinese measures implemented last week.
What TWE said
It has announced plans to reduce the impact of the provisional anti-dumping measure on imports of certain categories of wine from Australia into China, as announced by the Chinese Ministry of Commerce (MOFCOM) on 27 November 2020.
The measure is a ‘deposit’ rate of 169.3% to be applied to the imported value of the company’s wine in containers of two-litres or less. The provisional measure can remain in place until 28 August 2021 at the latest. The final determination will say if the measure will be maintained, adjusted or removed.
TWE said it will continue to engage respectfully with MOFCOM as part of the investigation, which is continuing.
The company expects that Chinese demand will be extremely limited whilst the measures in place.
The TWE plan to respond
Whilst FY21 is going to be impacted, TWE thinks it can turn things around over a two to three year period.
The company aims to reduce the impact on earnings and maintain its long term diversification and strength of its business model and brands.
TWE is going to reallocate its Penfolds Bin and Icon range from China, which represents 25% of its annual global Penfolds allocation volumes, to other key luxury growth markets where there is unsatisfied demand, including Asian markets outside of China, Australia, the US and Europe. It’s going to invest in its sales, marketing and distribution to make this possible.
It’s also going to reallocate its luxury grapes to other premium Australian brands including Wynns, Wolf Blass, Seppelt and Pepperjack.
In terms of China, it will change its operating and supply chain model. It will accelerate its multi-country of origin portfolio. It will grow sourcing from its existing asset base in France and potentially from China.
To adapt, TWE is going to reduce its global costs and reduce future vintage intakes.
Summary thoughts
In FY20, China represent two thirds of its Asian earnings and just under a third of TWE’s total earnings. It said that it has approximately $1.5 billion of liquidity on hand to get through this period.
This is a difficult period for the company, and more broadly gives pause for thought about any Australian business that makes a lot of sales into the Chinese market. Hopefully the iron miners aren’t affected by this.
But whilst this is a beaten-down share, it may not be a quick turnaround opportunity. There are other ASX growth shares I’d prefer to buy like Pushpay Holdings Ltd (ASX: PPH).
