After being sold off late last year, the Treasury Wine Estates Limited (ASX: TWE) share price is up nearly 15% in 2019 and there may be more upside. A booming Chinese market and innovative product line could see the Treasury share price grow substantially in the long term.
Promising earnings
Global wine producer Treasury boasts in impressive portfolio of brands including the likes of Penfolds, Wolf Blass and Beringer. The company operates in four main divisions, Australia and New Zealand, North America, Europe and Asia, selling to more than 100 countries.
Earlier this year Treasury reported promising half year earnings, generating its fastest ever organic sales growth across all four divisions. Net sales revenue increased 16% to $1.5 billion and Treasury lifted its half year dividend by 20% to 18 cents. Highlights of the report also included net profit after tax (NPAT) growth of 17% from the previous year to $219.2 million and 19% growth in earnings per share (EPS) of 30.5 cents.
Of particular interest were sales in its Asia division, with Treasury delivering $153.1 million in profit, a growth of 31% for the first half. Currently, Treasury accounts for 5% of the wines imported by China and announced plans to expand distribution into Asia by 50% over the next three years.
Chinese distribution
With a booming middle class, the Chinese division presents a great opportunity for Treasury to market its luxury and premium brands. As premiumization becomes a key factor in the food and beverage sector, Treasury is well positioned to take advantage of the market opportunity with its portfolio of luxury brands.
In comparison to its competitors, Treasury has a direct distribution model to Chinese consumers by selling directly to retail partners in comparison to rivals who go through third parties and pay greater commissions. This distribution strategy ensures potential for greater market share whilst also improving profit margins.
Product range expansion
Although earnings momentum in China shows great potential for Treasury, the company faces the challenge of maintaining growth over the long term. In order to sustain growth, Treasury aims to expand its product range by targeting the baijiu and French wine market share.
Baijiu is a traditional Chinese spirit and is the largest alcohol category in the world in terms of value. Treasury looks to expand its Penfolds range by introducing a baijiu infused product called Lot 158. The premise of the product is to appeal to Chinese consumers who are becoming newly accustomed to wine.
Currently, French wines account for nearly 40% of the wine market in China and Treasury looks to tap into this market share by acquiring two small wineries in France. The strategy behind the acquisition is to produce a French version of Penfolds in addition to two additional brands, providing consumers with alternatives to Treasury's Australian products.
Foolish Takeaway
In my opinion, the Treasury share price is a buy for the long term. Current and emerging markets present a great opportunity for future growth, however the challenge Treasury faces is sustaining earnings over the long term. Through an effective distribution strategy and by expanding its luxury and high-margin product range, Treasury has the potential for long term sustainable growth.
