Changyu is the country's olest and biggest wine producer (pic: file photo)
China Wine

Sluggish wine demand squeezes profits for leading Chinese wineries

Financial reports of major and listed Chinese wineries have shown that almost all suffered profit loss in 2018.

China’s sharp wine production drop and tepid consumer demand amid slowing economy have borne down on major and listed Chinese wine companies in 2018, with most suffering profit loss as company financial reports have shown.

The country’s slowing economy last year – worst in two decades – and uncertainties with the prolonged US-China trade war have gripped the country’s wine imports with a nearly 9% drop in volume, the first time since 2014.

With dwindling imports, domestic wine production in 2018 also recorded a sharp fall of nearly 40%.

Now it seems the overall grim economic outlook has taken a huge bite out of Chinese wineries’ year-end profits.

Available financial reports of 13 listed Chinese wine companies compiled by Chinese wine media WBO have shown that eight companies experienced profit drops and only three companies reported profit gains, with the remaining two’s data undisclosed.

Changyu Pioneer Wine Company, the country’s oldest and biggest wine producer, registered a moderate profit gain of 1.06% to RMB 1.04 billion (US$153.7 million) over 2017’s RMB 1.031 billion.

Figures of China’s second biggest winery GreatWall owned by China’s foodstuff conglomerate COFCO is not available since it’s not publicly listed.

Companies such as Hong Kong listed Dynasty Fine Wines and China’s family-owned Grace Vineyard both saw more than 20% drops in profits respectively, with Ningxia-based Chateau Farsight experiencing the steepest fall of more than 130% out of the 13 companies.

Production costs for Chinese wineries in land-locked Ningxia for example are driven up by the strenuous vine burying process in winter, land and irrigation.

The release of the reports coincided with the time when the country’s official alcoholic beverage trade org, China Alcoholic Drinks Association, unveiled that 212 large scale Chinese wineries in 2018 suffered both revenue and profit losses compared with 2017, highlighting the uncomfortable question of profitability for many Chinese wineries.

Out of the 212 wineries that have annual turnover of more than RMB 20 million (US$2.9 million), the association said the total production volume of the combined wineries dropped 7.36% to 62.91 million litres, and overall revenue declined by 9.51% to RMB 28.851 billion (US$4.28 billion). Consequently, profits suffered by 9.46% to RMB 3.063 billion (US$390.4 million).

With fierce competition from imported wines and high production costs, profitability for most Chinese wineries remains a challenge.

In some cases, imported wines are cheaper compared with domestically produced wines, especially with Chile and Australia, both enjoy zero import tariffs due to Free Trade Agreement.

Meanwhile, production costs for wineries in Ningxia for instance was driven up by the strenuous practice of vine burying in winter, land and irrigation.

Last year, Weilong Grape Wine Company, China’s third largest wine company from Shandong province in eastern China, suffered 18.1% profit loss to RMB 51.6 million.

Xinjiang-based Loulan Wine, Fang Xiang, Yi Zhu Wine, and Tonghua Grape Wine from Jilin province, and CITIC Guoan Wine, owner of Niya from Xinjiang, all reported different degrees of profit loss in the past year.

Incidentally, CITIC Guoan Wine has just announced that part of its shared have been frozen ordered by Beijing Higher People’s Court on 29 April for what the company says is caused by “contract dispute“, dealing a further blow to the company.

Dynasty Fine Wine, an embattled Chinese winery, was suspended on Hong Kong Stock Exchanges in 2013 amid allegations of faking invoices and selling expired wines. Its profit in 2018 dropped from HKD 119.8 million to HKD 91.8 million.

Coming off from a tepid year, hopes for a marked recovery are dimmed and the mood among producers remain cautious for the coming months.

Grace Vineyard in its company 2018 financial report further anticipated profit loss for the first quarter of 2019, given the current grim economic outlook. The report also said the company decided to halt the second phase construction of its new Ningxia winery temporarily.

For some large wine companies such as Changyu or Weilong, growth might be elsewhere outside of China.

Changyu has purchased several wineries overseas, with the latest purchase being Australia’s Kilikanoon Wines. Weilong likewise has looked down south to Australia, China’s second biggest wine supplier.

Its winery in Victoria is expected to release its first vintage soon just in time for the 2020 Chinese New Year.

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