Reporting season has seen very mixed results for companies doing business with China. A2 Milk Company Ltd (ASX: A2M) has returned to form, whilst Blackmores Limited (ASX: BKL) has struggled.
While the Treasury Wine Estates Ltd (ASX: TWE) share price closed 0.74% higher on Friday afternoon, its shares are trading 11.6% softer to $14.93 since the company reported earnings on 14 February 2019.
Due to the market sell-off in late 2018 and lofty expectations, the Treasury Wine share price now sits 25% below the company's all-time high of $19.85.
Treasury states that it has access to more than 13,000 planted hectares of vineyards, in some of the world's most sought after winemaking regions. The company uses these vineyards to produce a broad portfolio of wines, including household names like Penfolds and Wolf Blass. These wines are then distributed to four principal regions across the world: Australia and New Zealand; the Americas; Europe; and Asia.
1H FY19 highlights
For the first half of FY19, the company increased sales revenue by 16%, to $1,508 million. On a constant currency basis, the company saw the strongest organic growth rate in the company's history, being 13%. Importantly, Asian profits were up 31%, to $153.1 million. Net profit after tax and earnings per share rose 17% and 19% respectively, to $219.2 million and 30.5 cents per share.
The company now sits on a 2.34% fully franked dividend yield, after the announcement of an 18 cent interim dividend. The dividend grew 20% over the prior corresponding period.
Outlook for growth
Chief executive Mike Clarke believes that the strong growth in China can continue, as a result of the relatively low market share that Treasury boasts. The company currently has about 5% of the imported wine category in China. Because of this, the company is looking to acquire some French vineyards and two small French wineries. These will be used to sell a portfolio of three wines in China, including one under the premium Penfolds brand.
The company is also investing in its supply chains. The company is undergoing a 40% overhaul of its US distribution channels, alongside the recent opening of its expanded warehouse and distribution facility in South Australia.
Leadership shuffle
On the downside, there has been some unexpected turnover in upper management. Peter Dixon, ex-managing director of Asia and global travel retail has moved to Accolade Wines, a competitor to Treasury. Dixon was replaced by the chief operating officer of Treasury's Asian operations Tom King. King takes up the role from within the company, previously working as the managing director of Treasury's European operations. This follows the removal of ex-global COO Robert Foye, who breached the firm's internal code of conduct policies.
Foolish takeaway
Treasury Wine Estates is a quality company, selling a great portfolio of branded wines. The Chinese middle-class is growing rapidly and demanding more premium wine. Unless the Chinese economy undergoes a major slowdown, Treasury should be able to capitalise on this market. The Treasury share price will move on news, so I would look to buy shares when the P/E ratio dips.
