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Treasury Wine Estates Ltd (ASX: TWE) share price is making gains on Tuesday's trading session. As of the morning session, the wine company's shares have climbed 2.25% to reach AU$12.73 apiece.
Investors are showing confidence in the company today following an announcement from the Chinese Ministry of Commerce (MOFCOM). The announcement states that tariffs on Australian wine imports into China will be eliminated, effective March 29, 2024.
This development is expected to significantly benefit the sales prospects of the Penfolds owner in the Chinese market in the upcoming years. Responding swiftly to the news, the company is poised to take immediate action.
Treasury Wine Estates will commence collaboration with its partners in China to execute the detailed plan outlined during its half-year results announcement in February. This plan includes re-establishing distribution channels for Penfolds entry-level Australian COO portfolio, comprising Penfold's Max's, Koonunga Hill, and One by Penfolds.
Furthermore, the company will reallocate a portion of Penfolds Bin and Icon tiers from other global markets to progressively rebuild distribution in China. This strategic move aims to maintain the momentum in markets where Penfolds has experienced substantial growth in recent years.
Additionally, Treasury Wine Estates will reinstate distribution for its Treasury Premium Brands Australian sourced priority portfolio in China, including Rawson's Retreat. The company also plans to expand sales and marketing resources and increase brand investment in the Chinese market.
CEO Tim Ford expressed enthusiasm about the announcement, stating:
"The removal of tariffs is a significant positive for Treasury Wine Estates, the Australian wine industry, and wine consumers in China. We are committed to partnering with our local customers to reintroduce our Australian COO portfolio in the market, while continuing to contribute to the development and growth of the Chinese wine industry."
Ford emphasised the company's intention to pursue this medium-term growth opportunity in a deliberate and sustainable manner, focusing on expanding the portfolio in China while maintaining strong momentum in global markets.
Regarding the earnings impact, Treasury Wine Estates anticipates minimal incremental EBITS contribution for the remainder of FY 2024. This is due to increased shipments of Penfolds entry-level Luxury tier wines, offset by elevated overhead costs onshore.
Incremental growth resulting from the removal of tariffs is expected to be modest until expanded Bin and Icon availability from the 2024 Australian vintage is released, likely from FY 2027 onwards. However, based on early feedback from Chinese customers, the company believes the medium-term potential for Penfolds is robust, with the tariff removal expected to have a significant positive impact.
Analysts at Goldman Sachs view the tariff removal as a positive catalyst for the stock, noting strong reception by Chinese distributors for the return of Australian Penfolds to the market. They suggest that some distributors have been "hoarding cash" in anticipation of purchasing Bins and Icons allocations.
