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Goldman Sachs downgrades Treasury Wine due to China slow down
Treasury Wine Estates has been downgraded by Goldman Sachs because it says the Australian wine giant has “unrealistic” expectations in China.
Treasury Wine Estates chief executive Michael Clarke (Photo: Treasury)
The global investment bank warned in a research note that the winemaker’s company’s share price indicated that expectations in Asia were expected to grow by around 30% – but that this was “unrealistic” as the Chinese market is slowing.
It argued that wine consumption in China was set to grow instead in single digits – albeit mid to high single digits – over the next ten years, according to a report in Oz paper The Australian, and has downgraded the stock to ‘sell’.
In a statement quoted by Barrons.com, the bank said that Treasury, which had seen its market share in China grow over the last three years, was priced for “unrealistically high volume growth in China, at peak price points and peak margins”.
“Our analysis of the Chinese wine market suggests that volume growth will slow as the one-time benefits of the China-Australia free trade agreement pass and vintage variations limit luxury wine production from Australia,” it said.
It blamed pressure on both price and margin in the Chinese market, which was being driven by changing market dynamics, changing patterns of consumption and a less affluent demographic.
Last year, the company, whose brands include Penfolds, Wolf Blass, Lindeman’s and Rosemount, saw its earnings before tax (EBITS) in Asia grew by 40% compared with the previous year, to AU$102 million. Earlier this year it boosted the number of wines offered in the on-premise channel across China’s less developed second-tier cities, as well as introducing its newly added French wine portfolio, to capitalise on demand for premium imported wine.
The company is set to release its annual results on Thursday 17 August.
40% EBITS does seem like an unsustainable growth rate for the China wine market. Are new consumers coming into the market at an that amazing rate; or are you taking huge market share away from all of your competitors? And are those consumers willing to move up that fast in quality and price? 15% or 20% would be amazing, but 40%, hummm.