China might be trying to use beef, barley and wine as weapons in its trade war with Australia but when it comes to a drink at the end of the day Aussie wine remains a preferred tipple of discerning Chinese drinkers.

That’s the result of a close look at Australia’s biggest wine exporter, Treasury Wine Estates, which features among its brands some of the country’s top selling and highest priced wines, including sector leader Penfolds Grange which can go for more than $650 a bottle.

According to Credit Suisse, an investment bank, early fears of a wine wipeout in China after the government said it had launched an anti-dumping investigation against Australian wine do not appear to have materialized.

Ongoing strong sales in China, especially via online trading but less so in slightly softer in-store retail, has caused the bank to upgrade its Treasury investment advice from neutral to outperform.

Credit Suisse argues that a sell-off in TWE shares caused in part by bushfire smoke damage to vineyards earlier this year and compounded by the Chinese threat of re-imposing tariffs on Australian wine has been overdone.

Treasury shares which are trading around $6.35 ($A9.08) are expected to rise over the next 12-months by 35% to a target price of $8.60 ($A12.30).

Brand Equity With Chinese Consumers Remains Strong

Whether that investment assessment is right or not the key point in the Credit Suisse view of Treasury is that Penfolds “brand equity among consumers remains unaffected by China’s anti-dumping investigation”.

In fact, everything the bank said about Treasury and its multiple wine brands indicates that you can’t keep a discerning drinker, Chinese or Australian, away from a premium drop.

A number of marketing changes by Treasury over the past few months has seen wholesale inventory trimmed, an August price increase, the re-allocation of aged wine inventory to future years, and a refined rebate program to focus distributor effort.

“These developments have stabilized retail price points,” Credit Suisse said.

“We suspect shipment momentum continues to improve but is well below the previous corresponding period as we approach mid-Autumn festival and Golden Week in early October.

“The online channel is believed to be trading higher than the previous corresponding period but retail is believed to be softer.

Pent Up Demand

“We expect further improvement into the mid-Autumn festival/Golden Week with consumer sentiment generally improving but also some pent up wedding demand as couples move celebration from Chinese New Year to the upcoming holiday.”

Credit Suisse said the Chinese Government has warned that it might impose interim trade measures by October 17 while the anti-dumping investigation is underway.

“Based on an examination of wholesale price lists, a 15% tariff (equivalent to the rate prior to the free trade agreement would lift retail prices by about 5%.” the bank said. “A 50% tariff would lift retail prices by 20%.”

Credit Suisse said there was no data on market elasticity but it suspected any tax increase would be absorbed in the supply chain as consumer sentiment was still tentative.

Source Article