Tribeca Investment Partners discusses investing in wine

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Tribeca Alpha Plus Fund Portfolio Manager Jun Bei Liu discusses the opportunity afforded by investing in Treasury Wine Estates.

What is it with Chinese people and wine? As a Chinese-born Australian, I can tell you, it's not just about taste. Even if you mix it with Pepsi. Actually, China has had a very long history with alcoholic beverages. The first documented alcohol in China was first invented in 2100 BC. That's over 4,000 years of drinking culture. Now, in China, sharing a glass of wine brings friends and family together, but more importantly, business deals. No business deal is ever done without many rounds of ganbeis. But, traditionally, the alcoholic beverage space was dominated by spirits and beer in China. But what's interesting, though, in the last 30 years, the Chinese millennials, those that were born after the 1980s, have really changed the consumption pattern of alcoholic beverages in China. They love luxury and they love novelty, and they have a clear preference for wine over the very highly alcoholic spirits.

Now, these consumers represent about 30 per cent of the population in China and the majority of future middle-class households. Together they're expected to spend over US$430 billion on alcoholic beverages by the end of next decade, with wine being the fastest-growing category continuing to take consumption share. So, growing consumption from middle-class households in China is going to drive substantial growth in wine consumption. Now, foreign wine represents about 40 per cent of that share in China, and they grew from pretty much nothing three decades ago to over 59 million cases last year and close to US$10 billion. Australian wine really only started in the last 15 years since 2005, and it's been growing at 30 per cent per annum over the last 15 years. And in the last decade alone, it's gone up tenfold. And of course the fastest-growing category out of that is premium wine.

Why is that? Because Chinese middle-class households are growing rapidly, but its ultra wealthy population is growing even faster. Now, just a fun fact – that, since 2016, China had more billionaires than the US, and those wealthy and ultra wealthy Chinese consumers are demanding the finest wine in the world. Now, this insatiable demand has really, really driven the growth of luxury premium wine maker, Treasury Wine Estates (ASX:TWE). Now, this business, its premium labels have grown significantly. It not only kept up the pace with Australia exports into that region, but grew faster. Its growth has come from not just volume -- selling more wines into the Chinese population -- but through value. Its portfolio value. The price has been growing on average 10 per cent per annum over the last decade, and the Chinese consumer over the last decade has shown a significant amount of brand loyalty towards Penfolds’ premium labels.

If you look at some of the consumer surveys, Penfolds’ premium labels have consistently been rated in the top 10 most beloved wine in China, just after the old-school favourites, the French wines. Now, take this Bin 707, for example, one of the most popular labels in China. The price in the last four years has doubled. Bin 407, the price has gone up fivefold in the last 15 years, and this is not even to mention Penfolds’ ultra luxury range, Grange.

Now, Penfolds has demonstrated its ability to capture the hearts and minds of those Chinese consumers, and it's well leveraged to be exposed to the significant increase in spend on wine consumption. Now, why do we think there's an opportunity in buying this company here? Well, it's very cheap. Its valuation is essentially underpinned by those premium wines that are sitting in its cellar. We estimate over $4 billion sitting on Treasury's books are those premium wines that are ready in the cellars, and that represents over 70 per cent of the current share price. And the rest predominantly are those premium farmlands out of South Australia and to Napa Valley. At the current share price, you're not paying for any brand equity, nor are you paying for any future demand for such premium labels. The labels such as Grange, the labels such as 707, those labels that Chinese consumer just can’t get enough off.

Now, why or how has the share price gone so cheap at this point of the cycle? Let's address the elephant in the room. We all know there's been political tension between Australia and China. Many of the Australian exports into China have been impacted with high tariffs. Now, being one of the fastest-growing categories or exports into China, wine has of course been caught in that crossfire. The biggest question for investors, I guess, is what would future trade look like between China and Australia? And will we ever move past this?

Now, let me put that in perspective for you. What do you think about the relationship between Japan and China? The two countries have been pretty much competitors over the last 70 years. What about South Korea and China, and India and China? They all had their differences over the last 30 years, pretty much. And two of them just fired rockets at each other more recently. So, how do you think their trade with China has fared over that last 30 years? Let me show you. Despite the political uncertainty, there's barely any dent in terms of trade between China and those large trading partners. It is our view that this will pass, and we cannot dismiss China as a long-term trading partner. It will pass.

Now, coming to Treasury Wine more specifically, of course the tariff will come. But our view is that the current share price more than reflects that. If it was not for the speculation of higher tariff, the share price would have been much closer to $20 than it is closer to $8. Now, don't forget at the current share price you're largely paying for that premium inventory sitting in the cellar, and let's not forget the strong brand loyalty the Chinese consumer has demonstrated for this business. It is consistently rated one of the top 10 premium labels in China, and the Chinese consumer has consistently bought those labels regardless of the price changes. We don't believe an increase in tariff is going to change that consumption pattern or that demand significantly. If it creates any short-term disruption, it will pass. It will recover. And those premium bottles of Grange or 707 will find their way back into those consumers' hands.

So, to sum up, Treasury Wine holds a quality portfolio of premium labels that is highly sought after by global consumers and particularly those who live in Asia -- who, remember, will become the biggest spenders in the next few decades. Near-term uncertainty has created an enormous amount of opportunity buying this company at the current share price. And remember -- premium assets or premium labels and companies like Treasury Wine are just not going to stay cheap for long. Just in the last 30 days alone, we've seen three mergers and acquisitions taken place on the Australian stock exchange, and a premium asset like Treasury Wine is not going to stay cheap.

While this glass of 707 is amazing and it's smooth and well aged, it will taste even better knowing you almost paid nothing for it. Cheers.


Jun Bei Liu will be presenting at the Sohn Hearts & Minds Investment Leaders Conference on 19 November 2021. For more information, click here.