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Executive Summary The ongoing trade war between China and America represents a perfect opportunity for Australian companies to expand in the Chinese market. The current report outlines outstanding perspectives of Chinese wine market because of positive changes in alcohol consumption and low level of competition. Considering its international experience and absence of critical problems, Treasury Wine Estates (TWE) is a suitable proxy for business risks associated with Typhoon’s new initiative. Using the Capital Asset Pricing Model (CAPM), the authors of the report calculated all the parameters related to risk-return (equity beta, the rate of return on equity, WACC, and other indicators). All calculations can be found in section 3 of this report alongside with data and sampling justification. The results of the analysis demonstrate that TWE’s rates of return that can be used for the firm’s debt and weighted average cost of capital (WACC) are suitable for entrance into the Chinese wine market. However, Typhoon should not rely on TWE’s WACC when evaluating division-level investments. The current trade war between the United States and China will significantly limit the US share of the Chinese market. The wine export market is the more vulnerable one as wine is included as part of the US products that China has proposed a twenty-five percent tariff rate. The tariff and tax rate in total exceeds ninety percent per bottle of wine. Industry players and analysts have speculated that China might block US wines completely (Shen 2018, para. 1-2). As a joint report by Vinexpo and IWSR (as cited in Wang 2017, para. 2) states, China is predicted to consume 94 million cases of wine, which equates to 72% of global wine growth. Therefore, the dispute between the United States and China is creating a massive opportunity for Australian wine exports to China. In this case, Porter’s Five Forces can be used to assess the attractiveness of the Australian wine business in China and the potential of success in exporting to China. A scale of Low-MediumHigh was used as a measure of the strengths of each force. The Threat of New Entry: Low The Threat of competitive rivalry: Medium The United States was ranked sixth as one of China’s top 10 wine importers by country, and Australia was ranked second in 2017 (Wang 2017, p. 5&9). Existing rivalries have already divided China’s wines market share. Therefore, it is difficult for new entrants to access distribution channels. Which current competitors would be able to gain market share now becomes a key focus. France is a strong candidate since it occupied 40% of China’s wine market, ranked top in 2017 (Wang 2017, p. 10). However, Australian wine, as a representative of the ‘New World’, is continuing to boom and is expected to perform better with its political superiority of a Free Trade Agreement with China. Tariffs will be reduced to zero in 2019, which will significantly enhance the competitive position of Australian wines sales in China (Carney 2018, sec. 4). The Threats from Substitutes: Low to Medium The closest substitutes for wines are craft beer and Baijiu. However, “Ganbei (dry the glass)” has no longer been the only context in Chinese drinking culture, since Chinese millennials became the most important consumers of alcohol (Thibaud 2018, sec. 1&2). Market research firm Euromonitor (as cited in Tan 2017, para. 3) claimed that Chinese consumers are drinking less and prefer premium products with high quality and better taste. The changing of China’s drinking habits creates advantages for the future of wines sales in the Chinese market. The Bargaining Power of Buyers: Medium The Bargaining Power of Suppliers: no Significant Influences in This Case The switching costs for buyers are relatively low as they have plenty of choices of imported wines. However, Australia’s reputation of high quality has increased faith in brands and may translate into brand loyalty (Carney 2018, sec. 2). Overall Assessment In conclusion, the wine industry in China is assessed overall as highly attractive, and Australian wines are competitive and can successfully be exported to China. The analysis identifies that government policies (Free Trade Agreement) and a good reputation are the core competencies of Australian wine sales in China. Treasury Wine Estates (TWE), an international wine company, listed on the Australian Securities Exchange (ASX) is a suitable proxy for the business risk of wine exports to China in this case (ASX 2018). Treasury Wine Estates has made inroads and achievements in the Chinese market, and at the same time, Treasury Wine Estates is facing the same challenges as other wine sellers moving into China’s wine market. Industry body Wine Australia claimed that by the end of March 2018, the total Australian wine exports to China had a 51 percent increase to about $1.04 billion in the last 12 months (Financial Review 2018a, para. 2). Treasury Wine Estates made a significant contribution to the export success in China. The top two most popular Australian wine brands in China are Penfolds and Rawsons Retreat, both owned by Treasury Wine Estates. Wolf Blass, also owned by Treasury Wine Estates, ranked fifth (Financial Review 2018a, para. 3-4). On the other hand, Treasury Wine Estates is facing over-supply issues in China, which are common problems faced by wine companies. And more notably, the supply glut is concentrated in cheap products, including Rawson Retreat and Wolf Blass, which are mentioned above as best sellers. To clear out inventory, distributors had to offer discounts and bundle cheaper products with premium labels. Although the taxes and shipping costs are high, the price of Rawson Retreat is lower in the mainland than in Australia (Financial Review 2018c, para. 1-3). A Chinese distributor who did not want to be named (as cited in Financial Review 2018c, para. 4) said that Treasury Wine Estates is “heading for disaster”. Furthermore, Treasury Wine Estates has been affected by counterfeit liquor in China market. More than 50,000 fake Penfolds wine bottles were exposed this year (Financial Review 2018b, para. 1). China’s weak protection of brand and property rights has confronted the international business community for a long time. Copycats take advantages of imperfect laws and inadequate enforcement. Fakes of famous brands are common in China. Therefore, companies who are pushing into the Chinese market need to place high importance on counterfeit liquor problem, including Typhoon Group Ltd. Treasury Wine Estates is strengthening the investigations and carrying out enforcement against counterfeit liquor after the fake Penfolds case. The company is establishing a professional investigation team and working hand in glove with police and other Chinese authorities (Financial Review 2018b, para.8-9). TWE (as cited in Financial Review 2018b, para.11) also suggests consumers buy its products through official channels. Typhoon company can take advice from Treasury Wine Estates about preventing the sale of counterfeit. The challenges it is facing are typical and severe in the process of expanding into the Chinese market, that are non-negligible factors regarding business risk analysis. Overall, the achievements that Treasury Wine Estates have gained and the challenges it is facing in China both have reference values for Typhoon company. Therefore, Treasury Wine Estates is a suitable proxy for the business risk of wines. 3 Risk and Return – CAPM Approach Introduced by Sharpe (1964), Capital Asset Pricing Model (CAPM) provides a way to examine the relationship between systematic risk and expected return for stock under the assumption that all unsystematic risk could be diversified away. 3.1 Selection of data, sampling horizon and interval As presented by Figure (Market price table), a monthly sequence of adjusted closing stock prices of TWE from 30th June 2013 to 30th June 2018 is obtained through Morningstar DatAnalysis Premium (2018). To further objectively measure the return, TWE’s adjusted closing price should be applied, which consists of stock’s closing price and corporate actions including dividend distributions, stock splits and right offerings (Li & Li 2012). Considering that TWE entered ASX in 2011, a 5-year historical horizon is intercepted to avoid potential biases when estimating beta due to the price volatility during the initial years listed on ASX. Additionally, Eubank and Zumwalt (1979) stated that changes could be more likely to incur in the managerial strategies and business scale over a long period and could substantially lead to an inaccurate or irrelevant beta, which is regarded as another reason for shortening the horizon period to 5 year. Meanwhile, beta also varies sensitively depending upon various interval lengths (Brailsford & Josev 1997). The chosen monthly statistic on return appropriately reflects one-month summary of price fluctuation, which capably eliminates the amount of noise in data compared to daily return and also ensures the efficiency of beta estimation (Eubank & Zumwalt 1979). 3.2 Market Index S&P/ASX 200 Accumulation Index is applied as marker index (Figure: market price), since TWE has been publicly listed in ASX 200. As a vital indicator of Australian equity performance benchmark, ASX 200 could be regarded as highly persuasive to analysis the risk and return of TWE compared with other indexes (Zhao, Schmidt & Terry 2016). Meanwhile, the selection sampling horizon and interval of ASX 200 would be consistent with the selection of TWE for effective measurement. 3.3 Rate of Return and risk 做 variance 吗???? Rate of stock return is calculated as (Titman, Keown & Martin 2014): Monthly Rate of Return of TWE and ASX 200 is thus calculated as 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛 = 𝐴𝑑𝑗.𝑃𝑛+1 −𝐴𝑑𝑗.𝑃𝑛 𝐴𝑑𝑗.𝑃𝑛 The monthly return calculation results of TWE and ASX 200 are exhibited in Figure: market price. Adjusting Closing Price consists of the original stock price and the dividend distribution, as justified in 3.1. Therefore, average monthly return rates of TWE and ASX 200 can be computed as Arithmetic Mean across the 5-year period and further multiply by 12 respectively to obtain the annual return rates, which are 0.3260231 and 0.049564428. 3.4 Beta Calculation Bukvic, Kantor and Buljubasicc (2009) concluded that risk premium of one stock is regarded as proportional to the risk premium of market. For the estimation of the systematic risk on stock, beta coefficient is commonly applied (Milionis 2011). Beta of stock is calculated as the formula (Titman, Keown & Martin 2014): 𝛽= covariance (Xt, Yt ) variance(Xt ) While in order to precisely specify the relationship between the excess return of corporation stock and market index, regression model is constructed in beta calculation for a significance test of estimates (Milionis 2011). As presented in Figure (Regression Table), monthly return rate of TWE’s stock is inputted into the Y-value as dependent variable, and the monthly market return is entered into X-value imputation as independent variable. Hence the beta coefficient could be intercepted as the slope of the equation at 0.75786179, demonstrating that TWE’s stock is regarded as less volatility to ASX200 market index (Milionis 2011). As indicated by Figure (Pure play method ), leverage difference between Typhoon and TWE’s capital structure can be adjusted by Pure Play approach, which is a menthod to measure the cost of equity capital of private company through examining the beta coefficient of other comparable public traded company (Fuller & Kerr 1981). In order to remove the financial risk from TWE’s beta, unlevered beta can be determined with TWE’s capital structure as (Titman, Keown & Martin 2014): Then the adjusted beta could be estimated with the new unlevered beta calculated and Typhoon’s capital structure as (Titman, Keown & Martin 2014): According to Australian Taxation Office 2018), corporate tax rate in Australian is assumed as 30%. 3.5 Risk free Rate Risk free rate of return is regarded as another essential determinant of CAPM, under the assumption that investors can lend or borrow at risk-free rate (Warren 2008). Since little risk of default exists in government bonds comparing to corporate bonds, thus risk-free rate has been commonly assumed as government bond rate (Park 2012). In considering that Typhoon’s capital structure involves a 60% 10-year corporate bond, 10 years could be expected for financing on the current project as anticipated (Park 2012). According to Bloomberg (2018), the risk free rate could be referred to the government bond yield of 10 years at 2.72%. 3.6 CAPM imputation According to Titman, Keown and Martin (2014), expected return of one stock could be determined by 𝐸(𝑅𝑖 ) = 𝑅𝑓 + 𝛽 [𝐸(𝑅𝑚 ) − 𝑅𝑓 ] To measure an annual expected return, determinants including Risk-free rate and Return rate of market applied within CAPM should be consistent in annual frequency. Imputing all data of determinants into the formula, the annual expected return can be calculated as 5.6743% (Figure CAPM). 4 Cost of Debt As another component that constitutes capital structure, cost of debt effectively measures an overall rate on its debt financing. In addition, the measurement further capably gives creditors and potential investors a view on the corporation’s risk level regarding both financing risk and operation risk over the market (Barnea, Haugen & Senbet 1981). To determine the cost of debt, Miles and Ezzell (1980) proposed a way on estimation: 𝑹𝒅 = 𝑹𝒇 + 𝒓𝒊𝒔𝒌 𝒑𝒓𝒆𝒎𝒊𝒖𝒎 Considering the potential of default risk incurring, debt investors will always demand a measurement on return involving a premium on risk with risk free rate (Schaefer & Strebulaev 2008). The premium could evaluate the further return risk that an investment would be anticipated to yield in excess and thus acts as compensation on additional default risk for investors (Longstaff, Mithal & Neis 2005). As a result, the risk premium is regarded as another essential determinants of cost of debt in addition to risk free rate. As justified in Section 3.5 Risk-free rate, the risk-free rate is referred to a 10-year government bond yield at 2.72% (Morningstar 2018), which aims to keep consistent with the rate CAPM applied. To further measure the risk premium, yield spread is specified as the yield differences between the traded debt securities and the government bonds (Longstaff, Mithal & Neis 2005). Since bond issuers would have to pay the interest rate matching the credit migration risk, thus corporate bond is commonly rated depending on its potential default risk (Tillich & Ferger 2015). Assuming that the debt securities issued are A-rated, it implies that the bond securities are subject to lower credit risk and lower yields (Kisgen, D.J., 2006, p. 1037). Therefore, the credit spread of A-rated corporate bonds in 2018 could be reasonably obtained at 0.99% (Damodaran 2018). Accordingly, the required return of debt equals to 3.71% by adding up the two determinants, which states that its debt funding is expected to be acquired by issuers at around 3.71%. 5 The weighted average cost of capital (WACC) refers to the rate of return that an organisation is bound to pay all its various investor. The value calculated for capital budgeting is under perfect market. Under this circumstance, capital structure does not affect the result of WACC. The Modigliani-miller theorem (MM theorem) has raised the concept of “Perfect market” (VelezPareia elt. 2009, pp. 104-105). A perfect market condition is under perfect and complete information, homogeneous expectations, business risk, perpetual no-growth cash flows and no taxes exists (Modigliani & Miller, 1958). Assume the capital markets are perfect. The market value of levered cash flow is equal to the market value of unlevered cash flow plus the tax shield on interest payments. (Miles & Ezzell, 1980, pp. 727-728). According to Miles & Ezzell analysis, the value of the levered cash flow can be determined by the unlevered component discounting at a constant rate (Miles & Ezzell, 1980, pp. 727-728) which is equal to the ‘textbook approach’ WACC equation: 𝐷 𝐸 WACC (without taxes) = 𝑅 d× 𝐷+𝐸 + 𝑅e× 𝐷+𝐸 (Velez-Pareia elt. 2009, pp. 106) However, in real life environment, the market is imperfection because of corporate taxes exist. Under MM theorem proposition II, no matter how well the corporate operation they paid corporate taxes and taxes will affect the total value of the firms (Velez-Pareia elt. 2009, pp. 104105). Assume the firm has sufficient taxable income and an interest tax shields will appear and can be used immediately when interest is paid as a deducted from the firm’s taxable amount (Myers & Ruback, 1987). The cost of debt is multiplied by the tax shield (1-T) in order to adjust the levered firm value by discounting the unlevered cash flows (Koziol. C, pp. 656). Therefore, WACC after taxes can be calculated as: 𝐷 WACC (after taxes) = 𝑅d× (1 − 𝑇) × 𝐷+𝐸 + 𝐸 𝑅 e× 𝐷+𝐸 (Velez-Pareia elt. 2009, pp. 109) By estimate WACC in this report will rely on Treasury Wine Estate and markets’ 5 years data collected from 30/06/2013 to 30/06/2018. The first element is cost of debt Rd calculated by Rd = Rf + risk premium. According to part 4 in the report, the yield spread for credit A-rate corporate bond is 0.99% (Damodaran, 2018) and the risk-free rate for 10-year government bond rate is 2.72% (Morningstar, 2018). Therefore, the Cost of Debt is equal to 3.71%. The second element cost of equity Re is calculated using the Capital Asset Pricing Model (CAPM) and the formula provides by the model is E (Re) = Rf + β [E (Rm) - Rf ]. According to part 3 in the report, the annual expected return is 5.6743%. The third element is to determine the weight of debt and equity for relative proportion, with regard to the capital-structure weights, in this case scenario the Treasury Wine Estate financial statements as at 30th June 2018 provide the following information. For the debt, assume the borrowings in the Treasury Wine Estate balance sheet amounting to the market value of debt that is equal to $875.3m (Treasury Wine Estate, 2018, pp.65) and represent the total debts utilized to calculate the WACC. The equity is representing the ordinary share and the market value of equity is calculate by the number of outstanding ordinary shares multiplies the market price of each shares. Treasury Wine Estate has 718,663,546 authorised fully paid ordinary shares on issue (Treasury Wine Estate, 2018, pp.119) and the market share price for Treasury Wine Estate on 29th June 2018 is $17.39 (Morningstar.com.au, 2018). Therefore, the market value of equity is $12,497,559,064.94. Australia companies have a full imputation tax system from July 1, 1987 (R.R.Officer, 1994, pp.2). Under imputation tax system, shareholders dividend received from the company is attached a franking credit. Franking credit is when an investor receives dividend from the corporate, a ‘withholding tax amount’ may be attached because the company has had paid taxed at the company level (R.R.Officer, 1994, pp.2). Generally speaking, Imputation tax system avoid double taxation on dividends paid. The imputation tax system provides the subsidy for the firm’s payment on returns to equity via distribution credit and subsidy from deduct the interest payment on the cost of debt (R.R.Officer, 1994, pp.2). The dividend imputation tax system firm’s weighted-average cost of capital is given as: 𝐷 1−𝑇 𝐸 WACC= 𝑅 d× (1 − 𝑇) × 𝐷+𝐸 + 𝑅 e× 1−𝑇(1−𝛾) × 𝐷+𝐸 (R.R.Officer, 1994, pp. 6). Where 𝛾 is represents as the value of imputation tax credit. According to Treasury Wine Estates Annual Report, it stated that the dividend is 100% fully franked therefore the imputation tax credit is equal to 1, and the company tax rates in Australia is 30%. After putting all the data into the WACC equation, Treasury Wine Estates weightedaverage cost of capital is equal to 3.882%. WACC is a significant tool relevant in capital budgeting for making investment decisions, only when the internal rate of return on an investing project is exceed the WACC rate, this project can be acceptable otherwise the project should be rejected. The main objective in financial management is to maximizing wealth in capital budgeting decisions. Capital budgeting should account the effects of the investment decision and also the effects of the financing decisions (Miles & Ezzell, 1980, pp719). According to Miles & Ezzeel, the ‘textbook approach’ implication of the MM theorem which is the market value of levered cash flow is equal to the market value of unlevered cash flow plus the tax shield on interest payments (Miles & Ezzell, 1980, pp. 727-728). However, if Typhoon Group Ltd using the WACC rate of the company Treasury Wine Estate, which calculate under the ‘textbook approach’ is should be attributed into two factors: First, in capital budgeting as the rate for calculating the net present value of a similar project that is existing in the company, the project risk is similar to the average level of risk of the firm’s existing project, the cost of debt and equity can be observed from the market value to calculate the market value of rates of return on the corporate’s debt and equity securities. Second, the financing decision and investing decision should be separately in Typhoon Group because the single discount rate not only affect the operating risk but also affect the financing policy (Miles & Ezzell, 1980, pp. 727-728). According to Kruger, Landier and Thesmar (2015), in the real-life practices most of the firm use only single discount rate valuating all the investment projects which result failure to determine the project-specific risk particularly when making the decision on different project and they called it as a ‘WACC fallacy’. The evidence suggest that it will overestimate the value on a high-risk project and underestimated the low-risk project. By compute discount rate most company determine by CAPM model and the beta as the fundamental risk. The relative risk of several division with different risk level should measure by the difference between the specific project beta and the company beta. And the test also proves that there is a significant positive relationship between division-level investment and relative risk. Therefore, when determine the discount rate on division-level investment should calculate the industry beta rather than firm’s core division beta. If manager use a wrong beta to value the net present value of an acquisition is value destroying and the CAPM model fails to predict the stock return (Kruger, Landier and Thesmar, 2015, pp.1255). Moreover, Typhoon Group Ltd should not use the WACC from Treasury Wine Estate to evaluate the NPV of a different project since the risk may differ. If Typhoon Group Ltd has several divisions with different risk level; the discount rate use to evaluation individual investment project should be different than the WACC. Conclusion The current Chinese-American trade dispute opens a number of possibilities for Australian companies in general and Typhoon Group Ltd. in particular. For its entrance into the Chinese market, wine is the perfect product because of extensive growth of the local wine industry. Among all companies listed in ASX, Treasury Wine Estates (TWE) is the most suitable proxy for risks associated with investments in wine selling since the company has an international experience and stable financial indicators, such as equity beta, the rate of return on equity, and WACC. Thus, the risk-return ratio can be considered as suitable for Typhoon. However, the theoretical basis in the form of CAPM makes these indicators irrelevant for the real-life assessment of more targeted investments. Thus, Typhon management is advised to treat the company’s WACC with caution when it comes to individual investment projects. Reference List Asx.com.au, 2018, viewed 15 October 2018, https://www.asx.com.au/asx/share-priceresearch/company/TWE/details Carney, M 2018, ‘'It's a big market': How Australians are helping China become the world's biggest wine maker’, ABC News, viewed 13 October 2018, http://www.abc.net.au/news/2018-1001/australians-helping-china-become-worlds-biggest-wine-maker/10324624 Financial Review 2018a, ‘Australia wine exports to China soar through $1 billion and Treasury Wine rejoices’, viewed 13 October 2018, https://www.afr.com/business/agriculture/treasurywine-estates-believers-buoyed-by-china-export-boom-20180415-h0yt49 Financial Review 2018b, ‘Chinese police seize 50,000 bottles of fake Penfolds’, viewed 13 October 2018, https://www.afr.com/news/world/asia/chinese-police-seize-50000-bottles-of-fakepenfolds-20180327-h0y19c Financial Review 2018c, ‘Treasury Wine Estates facing China glut’, viewed 13 October 2018, https://www.afr.com/business/retail/fmcg/treasury-wine-estates-facing-china-glut-20180516h104xz Shen, W 2018, ‘Tariffs will drive US wines out of Chinese market: analysts’, Global Times, viewed 13 October 2018, http://www.globaltimes.cn/content/1115337.shtml Tan, H 2017, ‘China's drinking habits are changing — and that's a big opportunity for beverage makers’, CNBC, viewed 13 October 2018, https://www.cnbc.com/2017/12/28/beverage-makerschinese-are-drinking-craft-beer-wine-baijiu.html Thibaud 2018, ‘Understanding drinking culture in China - Daxue Consulting’, viewed 15 October 2018, http://daxueconsulting.com/understand-drinking-culture-china/ Wang, N 2017, ‘China’s top 10 imported wines by country’, Thedrinksbusiness.com, viewed 13 October 2018, https://www.thedrinksbusiness.com/2017/07/chinas-top-10-wine-importingcountries/ Australian Taxation Office 2018, Company Tax Rates, viewed 17 October 2018, https://www.ato.gov.au/Rates/Company-tax/ Bukvic, I, B, Kantor, N & Buljubasic, D, B 2009, ‘Project risk measurement trough beta calculation’, Annals of DAAAM & Proceedings, pp. 111. Brailsford, T, J & Josev, T 1997, ‘The impact of the return interval on the estimation of systematic risk’, Pacific-Basin Finance Journal, vol. 5, no. 3, pp. 357-376. Eubank, A, A & Zumwalt, J, K 1979, ‘An Analysis of the Forecast Error Impact of Alternative Beta Adjustment Techniques and Risk Classes’, The Journal of Finance, vol. 34, no. 3, pp. 761-776. Fuller, R, J & Kerr, H, S 1981, ‘Estimating the Divisional Cost of Capital: An Analysis of the Pure-Play Technique’, The Journal of Finance, vol. 36, no. 5, pp. 997-1009. Li, B & Li, J 2012. ‘Empirical portfolio analysis: MV vs CAPM’, Proceedings of International Economics Development & Research, International Association of Computer Science & Information Technology Press, np42, pp. 259-266. Milionis, A 2011, ‘A conditional CAPM: implications for systematic risk estimation’, The Journal of Risk Finance, vol. 12, no. 4, pp. 306-314. Morningstar DatAnalysis Premium 2018, Treasury Wine Estates Limited, viewed 17 October 2018, https://datanalysis-morningstar-comau.ezproxy1.library.usyd.edu.au/af/company/pricehistorydefault?ASXCode=TWE&page=1&resultsperpage=25&active=PRC_Sec1&xslgraphtype=tr10&xtm-licensee=datpremium Park, S 2012, ‘Optimal Discount Rates for Government Projects’, ISRN Economics, vol. 2012, pp. 1-13. Sharpe, W, F 1964, ‘Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk’, The Journal of Finance, vol. 19, no. 3, pp. 425-442. Titman, S, Keown, A, J & Martin, J, D 2014, Financial management: principles and applications, 12th edn, Pearson, Upper Saddle River. Warren, G, J 2008, ‘Implications for Asset Pricing Puzzles of a Roll‐over Assumption for the Risk‐ Free Asset’, International Review of Finance, vol. 8, no. 3‐4, pp. 125-157. Zhao, R, Schmidt, C & Terry, C 2016, ‘Index effects: Evidence from Australia’, Journal of Internet Banking and Commerce, vol. 21, no. 1, pp. 1. 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Running head: CHINESE WINE MARKET

1

Chinese Wine market
Name
Professor
Institutional affiliation
Date

CHINESE WINE MARKET

2
Executive Summary

The ongoing trade war between China and America represents a perfect opportunity for
Australian companies to expand in the Chinese market. The current report outlines outstanding
perspectives of the Chinese wine market because of positive changes in alcohol consumption and
low level of competition. Considering the company’s international experience and absence of
critical problems, Treasury Wine Estates (TWE) is a suitable proxy for business risks associated
with Typhoon’s new initiative. Using the Capital Asset Pricing Model (CAPM), the authors of
the report calculated all the parameters related to risk-return (equity beta, the rate of return on
equity, WACC, and other indicators). All calculations can be found in section 3 of this report
alongside with data and sampling justification. The results of the analysis demonstrate that
TWE’s rates of return that can be used for the firm’s debt and weighted average cost of capital
(WACC) are suitable for entrance into the Chinese wine market. However, Typhoon should not
rely on TWE’s WACC when evaluating division-level investments.

CHINESE WINE MARKET

3
Introduction

The current trade war between the United States and China will significantly limit the US
share of the Chinese market. The wine export market is the more vulnerable one as wine is
included as part of the US products that China has proposed a twenty-five percent tariff rate. The
tariff and tax rate in total exceeds ninety percent per bottle of wine. Industry players and analysts
have speculated that China might block US wines completely (Shen 2018). As a joint report by
Vinexpo and IWSR (Wang 2017) states, China is predicted to consume 94 million cases of wine,
which equates to 72% of global wine growth. Therefore, the dispute between the United States
and China is creating a massive opportunity for Australian wine exports to China.
In this case, Porter’s Five Forces can be used to assess the attractiveness of the Australian
wine business in China and the potential of success in exporting to China. A scale of LowMedium-High was used as a measure of the strengths of each force and it was found that;
1. The Threat of New Entry is Low
2. The Threat of competitive rivalry is Medium
The United States was ranked sixth amongst China’s top 10 wine importers by country,
and Australia was ranked second in 2017 (Wang 2017). The existing rivalries have already
divided China’s wines market share. Therefore, it is difficult for new entrants to access
distribution channels that current competitors would currently manage to gain an incremental
market share now becomes a key focus for all the players in the industry. France is a strong
candidate since it occupied 40% of China’s wine market, ranked top in 2017 (Wang 2017).
However, Australian wine, as a representative of the ‘New World’, is continuing to boom
and is expected to perform better with its political superiority of a Free Trade Agreement with
China. The Tariffs will be reduced to zero in 2019, which will significantly enhance the

CHINESE WINE MARKET

4

competitive position of Australian wines sales in China (Carney 2018).
The Threats from Substitutes: Low to Medium
The closest substitutes for wines are craft beer and Baijiu. However, “Ganbei (dry the
glass)” has no longer being the only context in Chinese drinking culture, since Chinese
millennials became the most important consumers of alcohol (Thibaud 2018). Market research
firm Euromonitor (Tan 2017) claimed that Chinese consumers are drinking less and prefer
premium products with high quality and better taste. The changing of China’s drinking habits
creates advantages for the future of wine sales in the Chinese market.
The Bargaining Power of Buyers: Medium
The Bargaining Power of Suppliers: no Significant Influences in This Case
The switching costs for buyers are relatively low as they have plenty of choices of
imported wines. However, Australia’s reputation of high quality has increased faith in brands and
may translate into brand loyalty (Carney 2018).
Overall Assessment
In conclusion, the wine industry in China is assessed wholly as highly attractive, and
Australian wines are competitive and can successfully be exported to China. The analysis
identifies that government policies (Free Trade Agreement) and a good reputation is the core
competence of Australian wine sales in China.
Treasury Wine Estates
Treasury Wine Estates (TWE) is an international wine company that is listed on the
Australian Securities Exchange (ASX). The company is a suitable proxy for the business risk of
wine exports to China in this case (ASX 2018). Treasury Wine Estates has made inroads and
achievements in the Chinese market, and at the same time, Treasury Wine Estates is facing the

CHINESE WINE MARKET

5

same challenges as other wine sellers moving into China’s wine market.
The Wine industry body in Australia claimed that by the end of March 2018, the total
Australian wine exports to China would be associated with a 51 percent increase to about $1.04
billion in the last 12 months (Financial Review 2018). Treasury Wine Estates was a significant
contributor to the export success in China. The top two popular Australian wine brands in China
are Penfolds and Rawsons Retreat, both owned by Treasury Wine Estates. Wolf Blass, is also
owned by Treasury Wine Estates and it is ranked fifth according to the Financial Review (2018).
On the other hand, Treasury Wine Estates is facing over-supply issues in China, which
are common problems faced by wine companies. And more notably, the supply glut is
concentrated in cheap products, including Rawson Retreat and Wolf Blass, which are mentioned
above as best sellers. To clear out inventory, distributors had to offer discounts and bundle
cheaper products with premium labels. Although the taxes and shipping costs are high, the price
of Rawson Retreat is lower in the mainland than in Australia (Financial Review 2018). A Chinese
distributor (Financial Review 2018) said that Treasury Wine Estates is “heading for disaster”.
Furthermore, Treasury Wine Estates has been affected by counterfeit liquor in the China
market. More than 50,000 fake Penfolds win...


Anonymous
Excellent! Definitely coming back for more study materials.

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