Morgan Stanley analyst: China a chance for Treasury Wine Estates

Treasury Wine Estates is sitting on a golden opportunity to ratchet up its market share in the core growth market of China.

Treasury Wine has had a difficult year with a string of profit downgrades and a diving share price. Picture: Bloomberg

Treasury Wine Estates is sitting on a golden opportunity to ratchet up its market share in the core growth market of China as well as benefit from upward pricing pressure as Beijing continues to open up its economy in the wake of a waning COVID-19 pandemic.

Consumption of premium wine and spirits in China is improving from the lows when the country first shut down earlier this year, with a lack of travel opportunities and greater socialising seeing discretionary spending directed to beverages, a new report says.

Morgan Stanley analyst Niraj Shah has reassessed Treasury Wine’s operations in the lead-up to the release of its full-year results later this month.

He believes the winemaker can restore its ailing profitability as Asia grows in strength and the business restructures its Americas arm to lessen commercial wine volumes and cut costs.

Treasury Wine has had a difficult year with a string of profit downgrades and a diving share price, with investor concern over its high exposure to a brittle Chinese economy and a wine glut in the US raising doubts.

But Mr Shah points to a number of positives in the Treasury Wine business, not least of which a much more bullish outlook for China, which drives around 40 per cent of total earnings.

China has proved a prickly place to do business of late as trade tensions make Australian wine an easy target for Chinese punishment over international disputes.

Its patchy economy faced shutdowns early in 2020 because of COVID-19, with consumers stuck at home, away from restaurants, banquets, bars and clubs.

But the outlook for China could be a little brighter, as consumers are unable to travel because of shut-down inter­national borders and have unspent cash.

“Consistent with recent Treasury Wine commentary, our channel checks indicate that wine consumption activity in China is above previous corresponding levels,’’ Mr Shah said.

“We hear this has been assisted by increased socialising and the lack of offshore holidaying which allows for increased discretionary spend in-country.

“Feedback suggests that the channel supply/demand levels have improved from two to three months ago and in some cases there is upwards pricing pressure. Importantly, our channel checks indicate no disruption to consumer activity or customs/logistics for Australian wines as a result of political/trade tensions.”

A survey of other premium beverage company performances in China also pointed to a more upbeat assessment of the China market.

“We are also comforted by recent data points from peers including Remy Cointreau, Pernod Ricard, Moutai, Davide Campari and LVMH,” Mr Shah said. “Although we are reluctant to conclude the results suggest a positive read through for Treasury Wine and its China business, we think the results show that in general things are not worse than expected in China for high-end/luxury liquor.”

Mr Shah said Treasury Wine had a significant long-term opportunity to increase penetration in China via stronger distribution.