Treasury Wine (ASX:TWE) share price sinks 12% after responding to China export tariff

The Treasury Wine Estates Ltd (ASX:TWE) share price is sinking lower on Monday after responding to China's tariffs on wine exports…

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The Treasury Wine Estates Ltd (ASX: TWE) share price is sinking lower this morning.

This follows the wine company's response to the Chinese Ministry of Commerce (MOFCOM) announcing tariffs on Australian wine exports.

At the time of writing, the wine company's shares are down 12% to $8.14.

How did Treasury Wine respond?

This morning Treasury Wine Estates announced that it will implement a series of plans to reduce the impact of the provisional anti-dumping measure on imports of certain categories of wine from Australia into China.

According to the release, a deposit rate of 169.3% will be applied to the imported value of Treasury Wine Estates' wine in containers of two-litres or less. This provisional measure will remain in place until 28 August 2021 at the latest.

However, the company notes that the final determination of the anti-dumping investigation will determine if the measure will be maintained, adjusted, or removed.

Management advised that it will continue to engage with MOFCOM as part of the investigation, which is ongoing.

What impact will this have?

The company has warned that while the provisional measure remains in place, demand for its portfolio in China is expected to be extremely limited.

This certainly is a bitter blow for the company given how important the market is for its business. It advised that in FY 2020, China represented approximately two-thirds of the total Asia region earnings or 30% of its overall group earnings.

It sells a premium portfolio in China, with luxury and masstige wine contributing 63% of volume and 91% of revenue in the country in FY 2020. Of the remaining portfolio, Rawson's Retreat is the largest volume commercial brand sold by it in China.

What now?

Since the commencement of the investigation, Treasury Wine Estates has been developing a detailed response plan. This plan will now commence immediately.

These initiatives aim to reduce the impact on earnings and maintain the long-term diversification and strength of its business model and brands.

While benefits are likely to be limited in FY 2021, management expects them to progressively reach their full potential over a two to three-year period.

The plan includes the reallocation of Penfolds Bin and Icon range from China to other key luxury growth markets, the accelerated investment in sales and marketing resource and capability across these markets, and the reallocation of luxury grape sourcing to other premium brands.

It also intends to make enhancements to its China business model and changes to its global operating model.

"Extremely disappointed."

The company's CEO, Tim Ford, commented: "We are extremely disappointed to find our business, our partners' businesses and the Australian wine industry in this position. We will continue to engage with MOFCOM as the investigation proceeds to ensure our position is understood. We call for strong leadership from governments to find a pathway forward."

"The strength of our brands, including Penfolds, combined with our diversified business model will allow TWE to implement a range of changes and plans that will enable us to manage through the significant impact of these measures going forward, as outlined in this announcement," he added.

Mr Ford warned that the Australian wine sector would be hit hard and jobs would inevitably be lost.

He explained: "However, there is no doubt this will have a significant impact on many across the industry, costing jobs and hurting regional communities and economies which are the lifeblood of the wine sector."

"We will continue to work with our valued partners to further understand the implications and how we can work with the industry, governments and others to support the sector. At the same time, we will continue to work with our customers and partners in China to demonstrate our long-term commitment to the growing number of Chinese consumers who enjoy our brands," the CEO concluded.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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