The Treasury Wine Estates Ltd (ASX: TWE) share price is pushing higher on Tuesday.
In morning trade, the wine giant's shares are up 1% to $12.59.
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Why is the Treasury Wine share price rising?
Investors have been buying the company's shares today after the Chinese Ministry of Commerce (MOFCOM) announced that tariffs on Australian wine imports into China will be reduced to nil, effective 29 March 2024.
This looks set to be a major boost to the Penfolds owner's sales in the coming years and the company is responding quickly to the news.
Effective immediately, the company will commence partnering with its customers in China to implement the detailed plan outlined with its half-year results in February. This includes re-establishing distribution for Penfolds entry-level Australian COO portfolio, including Penfold's Max's, Koonunga Hill and One by Penfolds.
In addition, it will be re-allocating a portion of Penfolds Bin and Icon tiers from other global markets in order to progressively re-build distribution to China, while maintaining the strong momentum in those other markets where Penfolds has successfully grown in recent years.
Finally, it will be re-establishing distribution for the Treasury Premium Brands Australian sourced priority portfolio in China, including Rawson's Retreat, as well as expanding sales and marketing resources and brand investment in China.
Treasury Wine's CEO, Tim Ford, commented:
Today's announcement is a significant positive not only for Treasury Wine Estates, but also for the Australian wine industry and wine consumers in China. Since the tariffs were introduced three and a half years ago, our commitment to China has been resolute, and we now look forward to partnering with our local customers to re-establish our Australian COO portfolio in the market while continuing to be a meaningful contributor to the development and growth of the Chinese wine industry.
This is a medium-term growth opportunity that we will pursue in a deliberate and sustainable manner, focused on growing our portfolio in China while continuing the strong momentum that we have delivered in several global markets over recent years.
What earnings impact will this have?
Treasury Wine doesn't expect a huge impact to earnings in the immediate term as it will take time and money to re-establish its presence in the lucrative market.
Management advised that the incremental EBITS contribution will be minimal through the remainder of FY 2024, with increased shipments of Penfolds entry-level Luxury tier wines to be offset by the step up in overhead costs onshore.
Until expanded Bin and Icon availability from the 2024 Australian vintage is available for release, which is expected to be from FY 2027 onwards, incremental growth due to the removal of tariffs on Australian wine sold in China will be modest. This will be driven by the increased shipments of entry level tiers into China, any incremental price increases implemented as part of Penfolds multi-year pricing roadmap, but partially offset by incremental overheads and brand investment in China.
Importantly, based on early feedback from customers in China, Treasury Wine "believes the medium-term potential for Penfolds is strong, and that the removal of tariffs will be a significant positive for the business."
Commenting on the news, analysts at Goldman Sachs said:
Whilst the tariff removal was widely anticipated amongst investors, its finalization still provides a positive catalyst for the stock, in our opinion. Our recent channel checks with multiple industry sources suggest there is strong reception by China distributors on the return of Australian Penfolds to the market and some have been "hoarding cash" in order to pay for the Bins and Icons allocations.
The Treasury Wine share price is down 2% over the last 12 months.
