Treasury Wine Estates shares soared to a record high of $14.61 on 11 September. The stock has softened a little since then, closing at $14.01 on Monday.
Over the last three years, the company's market capitalisation has tripled as it has ridden the wave of increased wine consumption in China.
The question is, does the stock have further to run?
Treasury Wine Estates is now trading on a PE of 34x for the current financial year, and, to some, is looking fully priced.
Goldman Sachs is recommending a sell on the stock.
Yet, Treasury Wine Estates has some of the most recognised wine brands in Australia: Penfolds, Lindeman's, and Wolf Blass, to name a few.
And the company is the largest supplier of imported wine into China with an estimated 3 per cent of the market.
The company has benefitted from the China-Australia free-trade agreement, and will continue to do so until January 2019, by which time tariffs will be completely removed.
Treasury Wine Estates is well established in the top-tier Chinese markets of Beijing, Shanghai and Guangzhou, where rates of consumption are highest, and higher margin products are preferred.
But the lofty growth expectations priced into Treasury Wine Estate's share price could be overdone.
The company sells into the US, Canada, Japan, elsewhere in Asia, and across Europe, but it is heavily reliant on one market – China.
The benefits of the free-trade agreement are finite, and when tariff reductions end, growth rates are likely to be impacted.
And Treasury Wine Estates could face a period of lower margins.
Though well established in the major Chinese markets, Treasury Wine Estates is now expanding into more sparsely populated and less affluent regions of China, which could put pressure on margins.
A poor vintage in 2014-15 is expected to hit margins in 2018, when the premium wines from that vintage go to market. Though to some extent, Treasury Wine Estates can make up the shortfall with wines from the US or France.
Chinese consumers prefer red wine, but white wine is growing in popularity in China, which could put pressure on margins because white wine is generally cheaper. (And remember that more than 50 per cent of wine consumed in China is rice wine.)
Growing levels of e-commerce in China could also pressure Treasury Wine Estates' margins, as consumers move away from the more lucrative direct-to-consumer and on-premises channels.
In a recent research note, Goldman Sachs said alcohol consumption in Treasury Wine Estates' Asian markets would have to exceed the rate of alcohol consumption in western wine-drinking countries to justify the current share price.
The glass might be empty for Treasury Wine Estates shares.
