It has been a difficult couple of years for the Treasury Wine Estates Ltd (ASX: TWE) share price.
Although the wine company's shares are up a sizeable 23% in 2021, they are still down approximately 37% over the last two years.
Why is the Treasury Wine share price down 37% in two years?
The main cause of the Treasury Wine share price weakness over the last couple of years has been its exit from the China market.
The wine giant was effectively kicked out of the country after Chinese regulators slapped significant duties on its wine following anti-dumping and countervailing investigations into certain Australian wine exports into China.
China's Ministry of Commerce put a duty rate of 175.6% on Treasury Wine's Australian country of origin wine in containers of two litres or less imported into China. This essentially means that a $50 bottle of wine would now cost $137.80 after duties have been applied.
Given how lucrative the China market was for the company, this created a huge gap in its earnings and unsurprisingly put significant pressure on the Treasury Wine share price.
Can Treasury Wine fill the gap?
According to a note out of Citi, its analysts are optimistic on the company's future and note that management is working hard to fill the Chinese earnings gap.
This includes the Penfolds brand shifting its strategy from Australian wine to French wine. This will see the company aim to launch its tariff-less French collection in China mid to late 2022.
Citi also commented: "The focus of this week's virtual analyst event with Penfolds Managing Director and Group CFO was on the i) China strategy following the import tariffs, ii) Penfolds ability to restrict wine supply from Asian markets ending up in China through grey channels, and iii) distribution opportunities outside China."
"We rate Treasury a Buy. We see the recent Frank Family Vineyards acquisition providing i) a significant distribution growth opportunity, ii) the scope to expand its market share in the luxury wine category, and iii) assistance to reach its 25% margin target, combined with the recent share price decline," it added.
Citi has a $13.80 target on the Treasury Wine share price. This implies potential upside of 17% for investors.
