Treasury Wine Estates Ltd (ASX:TWE) share price slumps 10 per cent on reports of China glut

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ASX:TWE

The Treasury Wine Estates Ltd (ASX:TWE) share price has been crunched, down $1.78 or almost 10 per cent to $16.24 after a report in the AFR said the wine producer is “facing a supply glut of its own making in China.”

According to the report, some mainland distributors report they are sitting on up to three years’ worth of low-end stock. Some were becoming increasingly frustrated at being forced to take low-end wines if they wanted access to the premium Penfolds wines, including Bin 407, Bin 389 or Bin 128.

“They [Treasury] are heading for a disaster, in my view,” said one Chinese distributor who asked not to be named.

China has been a huge growth region for Treasury Wine Estates, with the AFR report quoting Citi research saying the country accounts for half of Treasury’s sales in Asia and 80 per cent of its growth in the region.

Market darling

Under the leadership of CEO Michael Clarke, Treasury Wine has been a market darling over the past few years. From a low of $3.37 in February 2014, the Treasury Wine share price had traded as high as $20 earlier this month.

Responding to the report, Treasury Wine said it is comfortable with the sustainability of its operating model in China, to build a portfolio of brands, and of its disciplined approach to managing inventory levels with its customers.

The company cautioned on relying on feedback from selected customers in China, some of whom may not be growing with the company, and therefore may be motivated to speak out against Treasury Wine.

Delays

Treasury Wine did however confirm it is experiencing delays for some of its Australian Country of Origin shipments being cleared by the General Administration of Customs China (GACC) to replenish its inventory levels.

TWE Chief Executive Officer Michael Clarke commented: “The benefits of our global operating model means that we can allocate Luxury wines across regions, channels and fiscal years. This ensures brand scarcity is preserved and Luxury wine benefits from further maturation. Therefore, we have flexibility as to when and where this wine is sold in the short to medium term.” 

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Bruce Jackson has 30 years of hands on investing experience. He is passionate about stock market investing, running his own portfolio and SMSF. His focus is on small cap growth stocks. You can contact Bruce at brucej@thecapitalclub.com.au