TWE - Chart, page-102

TWE Bucking Softer China Macro Trends

Our China trip indicated broad based slowing across most alcoholic beverage categories, but TWE's push into lower tier
cities, local sales force and unique wholesaler model are enabling it to buck the trend. We lower FY20/FY21 earnings
forecasts modestly to reflect macro concerns but keep OW.

WHAT'S CHANGED
Price Target: From A$20.00 to A$17.00
FY20 EPS: From 76c to 73c

Tempering earnings expectations post China trip. Recent discussions with wine distributors and industry contacts in China indicate that end demand within the wine category has slowed in recent months. TWE appears to have bucked the slowdown as it pushes distribution into lower tier cities, leverages its local sales force (which many peers don΄t operate) and has a unique wholesaler model.

TWE noted at its AGM on Oct 18 that 1Q19 trading was inline with its expectations and recent comments from TWE management indicate that strong trading has continued and inventory levels have never been better (low). TWE΄s commentary is inline with Remy's comments last week that indicate no slowdown in China.

Our China trip observations:
1) Inventories are building in the channel;
2) TWE's price points were lower YoY and retailers were offering more promotional deals;
3) TWE's China sales force appears to be executing well;
4) TWE is outperforming peers;
5) TWE is a fraction of the Chinese liquor market;and
6) we think this down cycle is shallow compared to the 2014-15 downcycle.

So why remain OW? We view the China slowdown as temporary, rather than lasting, so the market should look through recent weakness. TWE΄s shares have fallen 28% since August results largely on the concerns of a weaker China market. We revise our earnings forecasts lower by 2% to 6% to reflect the slower China market. TWE now trades on 19x our new FY20 EPS forecast of A$0.73 which we view as cheap relative to global peers. We acknowledge the future path may be bumpy given the market needs to reset expectations. Should TWE continue to invest we think it can emerge a stronger healthier business which is well placed for the long term.