China’s Tariffs End Treasury Wine’s Growth Party, but Market Offering Discount to our AUD 11 FVE

No-moat Treasury Wine’s geographic diversity will be put to the test following the installation of a demand-destroying 169.3% tariff by China’s Ministry of Commerce against the company’s imported Australian wine, along with similar lofty excises on all other Australian wine producers. The tariff effectively shuts the door to Treasury’s arguably most important market. While Euromonitor estimates the total volume at only about 5% to 7% of the firm’s consolidated total, Treasury sells primarily high-end wines such as Penfolds in the country, which is both high price and margin. As such, the company notes China alone represented 30% of fiscal 2020 earnings. Management plans to reallocate some of this wine to other markets in the region, but the associated sales and marketing efforts will take time, leaving a sizable earnings hole in fiscal 2021. We’ve cut our fiscal 2021 EPS forecast by about 16%--given the loss of more than half-year’s contribution from China--and fiscal 2022 by 22%, to AUD 53 cents. Our fair value estimate is now AUD 11.00 per share, down 11%.