Treasury Wine Estates could regain as much as $100m in extra earnings by 2026 if China wine tariffs are dismantled

Penfolds maker Treasury Wine Estates stands to regain hundreds of millions of dollars in lost sales if China dismantles its tariffs, but getting hands on enough top shelf wine could be a challenge.

Treasury Wine Estates could regain as much as $100m in extra earnings if China wine tariffs are dismantled, led by its famous luxury wine Penfolds.

The reopening of China to Australian wine imports could pour as much as $100m in extra earnings into the coffers of the nation’s largest winemaker Treasury Wine Estates over three years, analysts believe, as it redirects some of its most popular, and profitable, brands into the region such as its large portfolio of luxury Penfolds wines.

However, if the Chinese government dismantles the crippling tariffs on Australian wine, with hopes of improved trade relations heightened overnight following speculation punishing wine tariffs will soon be swept away, Treasury Wine is not tipped to regain 100 per cent of its lost sales from before tariffs were imposed in late 2021.

The winemaker, famous for its brands such as Penfolds, Pepperjack, Wolf Blass and Lindemans, will also need some time to build up inventories of wine aged between two and five years to sell to Chinese consumers, slowing the hoped rebound in earnings from China being ‘open for business’ again to Treasury Wine.

However, hopes of a looming end to the tough tariff regime – which placed crushing tariffs of more than 200 per cent on some Australian wine imports – sent shares in Treasury Wine up more than 1 per cent on Wednesday to $12.69 after investors reacted to a potential trade breakthrough.

The Australian wine industry is now one step closer to reclaiming ­access to the lucrative China market and more than $1.2bn in annual sales after the powerful Chinese Ministry of Commerce released an interim draft determination that proposed a lifting of crippling tariffs on Australian wine imports.

The largest exporter of Australian wine to China, ASX-listed Treasury Wine, said on Tuesday night it had been advised of the draft ­determination. It noted it was not a final determination and was “subject to change” by the ministry.

E&P Financial analyst Phillip Kimber said that prior to Covid-19 and the slapping of tariffs on Australian wine, Treasury Wine’s China operations delivered $180-$200m of annual earnings, which was predominantly through the sale of around 600,000 case of luxury and Icon Penfolds wines.

Treasury Wine Estates has been sitting on extra supplies of its luxury wine Penfolds as it awaits the dismantling of Chinese wine tariffs and it prepares to reenter the market.

Mr Kimber said if Treasury Wine were to regain half of that lost business, 300,000 cases, it would add 10 per cent to group earnings in the third year. But getting its hands on enough supply to shift to the China market could be a short-term challenge, countered by the opportunity to hike prices and make more profit. The extra bump to earnings would be as much as $100m by 2026 if half that business came back.

“Given these ‘Bin and Icon’ wines typically have a 2 to 5 year release profile, it will take some time to rebuild additional inventory levels for the Chinese market. In the interim, Treasury Wine may be able to take some additional price, noting every 1 per cent price increase in its Penfolds business equates to an additional $9m of earnings.

“In addition to any potential pricing benefits, every 100,000 cases of ‘Bin & Icon’ wines sold into China adds around 4 per cent to our group earnings by the third year.”

Jarden analyst Ben Gilbert said there is a high probability tariffs are ultimately removed, with Treasury Wine stating it expects any earnings contribution to be minimal through the remainder of fiscal 2024.

“The above said, we would expect some benefit in the second half, with upgrades to be more material into 2027 and beyond once supply is rebuilt on the Icons range.”

Mr Gilbert added he didn’t believe the tariff removal issue was fully priced in to the share price with more than $2 per share of implied medium-term valuation upside, or as much as $3 per share as scarcity emerges for the luxury Penfolds brand, it attracts higher prices, and it ups its earnings contribution to the group.

“We remain positive on Treasury Wine, and if tariffs are eased, it would drive material near-term upside, with our estimates implying a more than $3 per share of valuation upside. We continue to believe the market is materially undervaluing Penfolds, which is one of the valuable wine brands globally and trades, on our estimates, at an implied 5 per cent discount to market.”

Treasury Wine said it expected that a final determination would be issued regarding tariffs on Australian wine imports by the end of the month. The company has maintained a foothold in the China market in recent years by sending wine made in the US and France to China and supporting the development of the Chinese wine industry, including production of a Chinese-made Penfolds released last year.

The company’s chief executive, Tim Ford, has maintained confidence in the future of the China market despite the tariffs, and told investors at the company’s half-yearly results in February that the winemaker was holding back some supplies to be ready to reenter the China market with Australian wine if the tariffs were lifted.