Yantai Changyu Pioneer Wine Co. Inc. (200869 CH) is China's largest wine producer, with a domestic market share of 11%.
The company has an illustrious history. It was founded during the Qing dynasty in 1892 by Cheong Fatt Tze, who bought 640,000 plants from Europe to grow grapes in the Shandong province of China. After three years of experimentation, he finally managed to find grapes that were well suited to the climate. The Yantai-Penglai region is now the core of China's wine industry, representing roughly 40% of domestic output.
Changyu is now one of the top three brands in the industry together with Great Wall and Dynasty. Changyu's main Cabernet line costs somewhat above RMB 100 per bottle, but it also has much more affordable alternatives in the RMB 30-60 range. While the quality of their wines lags those of France or Australia, Changyu has been making progress. It has sought the help of European experts to develop its wines and even sought equity investments from foreign wineries. Changyu's new production facilities use state-of-the-art European equipment.
After incredible growth in the 2000s, Changyu suffered throughout the 2010s. The first hit was from Xi Jinping's anti-corruption campaign launched around 2013. Following the anti-corruption campaign, sales of wines to restaurants used for government or SOE dinners was practically banned. Changyu's revenues took a nose-dive. Before the company had a chance to recover, imports of foreign wines sky-rocketed, partly thanks to lower tariffs. Foreign wines now make up roughly 53% of China's wine market. And finally, in 2020, COVID-19 hit the restaurant industry, putting a further dent in Changyu's top-line growth.
These negative factors are now most likely coming to an end. Changyu reported a recovery in the third quarter of 2020 as China recovered from COVID-19. The prospects of mass-distributed vaccines increase the hopes for the normalisation of the restaurant distribution channel. Second, China has imposed punitive tariffs on Australian wine of 107-212%, essentially shutting out roughly 19% of the supply. Some of this demand will switch to French or Chilean wines and some will flow to domestic producers such as Changyu.
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