Marlborough Wine Estates — Update 30 June 2016

Marlborough Wine Estates — Update 30 June 2016

Marlborough Wine Estates

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Marlborough Wine Estates

Winning wines

Food and beverage

NXT Company Spotlight

30 June 2016

Price

NZ$0.20*

Market cap

NZ$59m

*Indicative price based on last private share issue in June 2016

Share details

Code

MWE

Listing

NXT

Shares in issue

293.3m

Business description

Marlborough Wine Estates (MWE) owns and operates six vineyard blocks in the Awatere Valley in the Marlborough wine district of the South Island in New Zealand. MWE sells bottled wine to China, NZ and other markets as well as bulk wine and grapes to wine producers in New Zealand.

Bull

Marlborough white wines, particularly sauvignon blanc, have a global reputation for quality

Option to improve earnings by converting more of the grape harvest into bottled wine for local and export sales

Improvements in vineyard management, particularly in securing water supply, could improve grape yields

Bear

Maintenance of premium pricing is dependent on quality of the product

All distribution in Asia being made by related parties, albeit that the related party is purchasing bottled wine at a premium of 30% to the average NZ export price for white wine

Greater demand for MWE’s products may depend on conversion of Asian markets from red wines to premium white wines

Analysts

Moira Daw

+61 (0)2 9258 1161

Finola Burke

+61 (0)2 9258 1161

Marlborough Wine Estates (MWE) was formed in March 2015 to acquire vineyard assets, inventory and distribution agreements comprising the Otuwhero Estate from Min (James) Jia. The purchase was satisfied by the issue of 240m shares. At the last private issue price of NZ$0.20 per share, this valued the consideration received by the founder at NZ$48m, compared with the April 2013 book value for the assets of NZ$13.1m. Products sold in FY15 (pro-forma) include bulk grapes (67.6% of revenue) and bottled wine into China (21.1%), New Zealand (NZ) (4.3%) and other markets (7.1%). MWE is undertaking a compliance listing on the NXT market, with no new capital being raised.

Producing premium white wines for export

MWE produces premium-quality white wine, mostly sauvignon blanc, sourced from its vineyards. The grapes are converted to bulk and bottled wine by a contract processor with oversight from MWE’s chief winemaker, or are sold to other winemakers as bulk grapes (68% of revenue in FY15). Bottled wine (32% of FY15 revenue) is MWE’s highest margin product. MWE sells its export wine to related party distributors at a premium of ~30% to the average industry wide average FY15 price of NZ$11.86 per litre. In FY15, 76% of MWE’s export sales were made to China and Hong Kong.

Growth from production increases

MWE plans to increase vineyard production by 5% per year until the vineyards are producing 2,000 tonnes of grapes pa from 1,401 currently. The strategy is to continue to position its O:TU brand wine at the premium end of the market, increase the sales of bottled wine through increased market penetration in China and Hong Kong and expand into new markets. Growth is also expected from acquisitions and by expanding into other NZ-sourced food and beverage products.

Valuation: Peer group trading at 3x to 4x EV/sales

The FY15 pro forma financial statements show MWE making gross profit of NZ$0.46m before other revenue and fair value adjustments. It is not possible to make meaningful earnings multiple comparisons due to the size and maturity of the peer group. The three peers (Australian Vintage, Delegat and Foley Family Wines) are trading on EV/sales multiples of 3.0x to 4.0x. Using MWE’s latest private capital raise price of NZ$0.20/share and implied market cap of NZ$58.7m (and net debt of $5.1m at end FY15), sales will need to reach ~NZ$16m to ~NZ$21m for MWE to be priced on the same EV/sales basis. MWE’s FY15 sales were NZ$2.4m.

Historical performance

Year
end

Revenue
(NZ$000s)

NPAT***
(NZ$000s)

EPS
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/15 PF*

2,788

170

0.1

0.0

N/A

N/A

06/15**

1,865

590

0.2

0.0

N/A

N/A

Source: Marlborough Wine Estates. Note: *Pro forma for 12 months; revenues includes sales revenue and other revenue; **actual from 18 March 2015 to 30 June 2015; ***NPAT includes positive fair value adjustment of NZ$1.054m.

Company description: Producing premium sauvignon blanc wines in Marlborough

MWE owns and operates the Otuwhero Estate, a 157ha vineyard located in the Awatere Valley in the Marlborough wine growing region of the South Island of New Zealand. The 157ha vineyard has a productive capacity of 1,500 tonnes of grapes per year (equivalent to ~1.125m litres of wine)1. In addition to the planted vineyard MWE has a further 179ha of vacant land. Under the Overseas Investment Office (OIO) conditions MWE is required to convert bare land to vineyards. MWE has identified a potential 45 hectares of plantable area. It is implementing irrigation systems, however, further investigation will be required before actual planting starts. The new vineyard will take five years to begin meaningful production. Once the vines have matured, peak yields should be sustained for at least 15 years.

Based on 750 litres of wine per tonne of grapes (conversion factor provided by MWE management).

MWE sells the grapes in three product lines:

Bottled wine sold in NZ and Asia, mostly to consumers in the People’s Republic of China.

Bulk wine sold to NZ wine producers.

Grapes sold to NZ wine producers.

It has two key brands of bottled wine:

O:TU, which is sold as a premium wine targeting high-income demographic groups, particularly in China where MWE’s board believes premium wine is becoming an affordable everyday luxury.

Music Bay, which has been developed as a mid-price wine targeted for sale in the NZ market to off-premises outlets and retailers.

MWE’s pro forma sales profile (exclude other revenues) for FY15 is shown in Exhibit 1 below:

Exhibit 1: Pro forma sales (12 months to June 2015)

NZ$’000

FY15

% of sales

NZ (bottled)

103

4.3

China (bottled)

509

21.1

Other markets (bottled)

171

7.1

Total bottled wine

783

32.4

Bulk grapes

1631

67.6

Bulk wine

0

0.0

Total sales

2414

100.0

Source: MWE Listing Document, page 10

MWE does not own wine processing facilities. Its wines are produced by a contract processor, Spring Creek Vintners, under the direction of MWE’s chief winemaker, Jan Kux, a qualified sommelier with 20 years’ experience in winemaking and vineyard operations.

NZ-bottled wine is sold through supermarket chains and wine distributors, which sell both online and through bricks and mortar stores. Offshore sales are made via non-exclusive distribution agreements with two related party distributors – Great Esprit based in Hong Kong, and New Zenith International Trading (Shanghai) (NZIT).

MWE has contracts in place for the purchase of 1,160 tonnes of bulk grapes from the FY17 vintage. Beyond that, there are no formal agreements in place and formal negotiations for renewing contracts have not begun. Management has stated the two purchasers have indicated they are willing to continue their respective arrangements beyond FY17.

Company background

In March 2015 MWE acquired the vineyards known as Otuwhero Estate and Donaldson’s block from its founder and 82.6% shareholder Min (James) Jia, together with inventories and distribution agreements, giving rise to an intangible asset of NZ$5.153m (as at 30 June 2015).2 The purchase was satisfied by the issue of 240m shares, which at the last private issue price of NZ$0.20 per share values the acquisition at NZ$48m.

Audited Financial Statements of MWE for period 18 March 2015 to 30 June 2015.

Min (James) Jia has a background in property development and investment. He formed a relationship with Otuwhero Estate in 2011 when he acquired the rights to produce, market and sell the O:TU brand wines following the 2011 harvest. The vineyard assets were acquired in March 20133 (with foreign investment approval obtained on April 2013), when Min (James) Jia purchased the 256ha Main Block from receivers (Deloitte) and the adjacent 79ha unplanted block known as Donaldson’s. The market value as stated in O:TU Investments’ 2014 audited financial statements for the Main Block, the Donaldson’s block and associated inventories and other assets was NZ$13.1m.4

“Chinese buy 300ha in Marlborough”, Richard Woodward, Decanter, 4 June 2013

O:TU Investments audited 2014 financial statements

A new company was incorporated on 18 March 2015 and acts as a holding company for the wholly owned subsidiaries that were previously owned by Min (James) Jia.

Exhibit 2: MWE corporate structure

Source: MWE Listing Document, June 2016 Page 10. Note: All subsidiaries are 100% owned

Capital raises

In anticipation of its proposed listing on NXT, between November 2015 and June 2016 MWE raised NZ$141,400 (707,000 shares) from investors in NZ and China. In addition, Min (James) Jia sold 47,462,986 shares for total proceeds of NZ$9.5m5 to improve the shareholder spread. With the exception of shares issued to three directors and one senior manager, all sales were made to unrelated parties at NZ$0.20 per share. The company advises that there have been no other capital raises.

Listing document, page 28

Business structure

MWE owns the land. It uses contractors to manage the vineyard operations and crush grapes, has the wine production process supervised by MWE’s chief winemaker and sells bulk grapes and bulk wines in NZ. Bottled wine sales in NZ are managed by MWE; outside NZ (mostly in the People’s Republic of China) bottled wine sales are made by two related party distributors.

Exhibit 3: MWE business functions

Source: MWE Listing Document, June 2016. Note: Solid lines indicate an outsourced activity and dotted lines indicate an in-house activity.

Distribution of bottled wine in Asia

Distribution of bottled wine in Asia is conducted by two distributors:

Great Esprit (GEL), a Hong-Kong based entity owned by an associate of MWE’s executive chairman, Min (James) Jia. It is therefore considered to be a related party. Material changes to the terms of this agreement may require shareholder approval under the NXT listing rules. The non-exclusive distribution agreement covers Hong Kong, China and other yet to be exploited markets in Asia. The agreement requires GEL to purchase NZ$1.4m, which is 87.5% of the key operating metric (KOM) of bottled wine in 2016 and NZ$3.0m (93.8% of KOM) in 2017. GEL purchases the wine at a pre-determined per-litre price based on the average white wine export price to China, which was NZ$11.86 per litre in 2015.6 In FY15 the average price of all MWE’s local and international bottled wine sales (6,587 cases or 59,000 litres) was NZ$13.29 per litre, an average premium of 12.1% on the average white wine export price. MWE advises that it sells its bottled wine to GEL at an average premium of ~30% to the NZ white wine export price, which is NZ$15.40 per litre, or NZ$11.55 per bottle, based on FY15 pricing.

NZ Winegrowers Incorporated 2015 Annual Report, Page 35

New Zenith International Trading (Shanghai) (NZIT) is owned by Min (James) Jia and is a related party. The non-exclusive distribution agreement with NZIT for selling bottled wine to China involves NZIT placing orders directly with MWE on the same terms and conditions as GEL. Purchases of bottled wine by NZIT reduce the minimum quantity commitment of GEL.

O:TU premium wine also trades on the Shanghai International Wine Exchange (SIWE), an online platform established by the Shanghai government to facilitate the trading of authenticated fine wines and to educate Chinese consumers on the finer points of wine appreciation. In November 2014 MWE listed 27,900 bottles of 2013 premium sauvignon blanc on SIWE at 680 yuan per bottle (US$103)7. Management advises that members (shareholders of MWE under the Joint Ownership scheme) are able to purchase this wine at RMB360 per bottle. Purchases are limited to one per customer. The SIWE only makes agreements with genuine wine producers so the contract, although fulfilled by NZIT, is between MWE and SIWE. The Listing Document (page 44) states that Min (James) Jia has provided MWE with financial and contractual indemnities. In our view, the presence of O:TU wines on SIWE is an important part of establishing the wine as a premium and highly sought-after product in China.

Exchange rate 1.39 yuan = US$1

Risk and return

We have looked at the FY15 pro forma revenue, cost and production data to analyse the returns for MWE and the returns for the distributor. The recommended retail price for O:TU wines in NZ is dependent on the variety, the vintage and the distribution outlet. The prices range from NZ$108 per bottle for prestige wines sold at duty free outlets to NZ$21.99 per bottle for sales made in supermarkets. The Music Bay range sells in NZ for between NZ$16.99 and NZ$19.99 per bottle. In China on SIWE the premium O:TU 2013 sauvignon blanc has a list price of 680 yuan (US$103) per bottle. We understand from management that it expects the MWE wines sold in China and elsewhere in Asia to be successfully positioned as a premium product and achieve an average sales price of ~NZ$40 per bottle.

As the owner of the vineyard, MWE is exposed to all risks related to vineyard management and production as well as to wine quality issues through the winemaking process. The financial data in the Listing Document and pro forma financial statements show that MWE made a cash profit in FY15 (see Exhibit 4).

Exhibit 4: FY15 pro forma revenue and cost data used to calculate profit per litre

NZ$

Litres

Per litre NZ$

Bottled wine sales

784,000

59,000

13.29

Bulk grapes sold

1,631,000

716,250

2.28

Total sales

2,414,175

775,250

3.11

Cash cost of production

1,114,513

775,250

1.43

Cash gross profit

1,299,662

775,250

1.68

Operating costs

885,255

775,250

1.14

Cash profit

414,407

775,250

0.54

Source: MWE reports. Listing Document page 11 for sales, page 34 for tonnages, which have been converted to litres at the rate of 750 litres per tonne of grapes. Pro forma unaudited financial statements 2015 for accounting cost of production and operating costs. Non-cash item of NZ$0.84m excluded from the cost of production was advised by MWE management.

Cost of production is shown in the company’s pro-forma unaudited financial statements for the year ended 30 June 2015 as NZ$1,956,231. MWE has advised that there were non-cash items totalling NZ$841,718 comprising a change in fair value of agricultural produce and inventories of biological assets. This non cash adjustment has reduced cost of production from NZ$1,956,231 to NZ$1,114,513 (see Exhibit 4 above).

Exhibit 5 uses FY15 data to show a cash profit after operating costs of NZ$0.54 per litre compared with a gross profit for the distributor and the retailer of up to NZ$176.23 per litre for any wine sold on SIWE. Management advises that members (shareholders of MWE under the Joint Ownership scheme) can purchase this wine on SIWE for RMB360 per bottle compared with the list price of RMB680 per bottle. The related-party distributors and retailer bear the sales, marketing, promotion, SIWE membership and distribution costs as well as the pricing risk.

Exhibit 5: Profit per litre analysis using FY15 pro forma unaudited financial statements

Source: MWE Listing Document, Edison Investment Research. Note: The per litre revenue and cost data used have been determined as in Exhibit 4. The per bottle sale price of RMB680 is the listed price for 2013 sauvignon blanc on SWE. MWE members received a discount of ~47% on the SIWE list price and pay RMB360 per bottle

FY15 results excluded the sale of bulk wine, which were deferred until 2016 because of weak prices (down 5% on the previous year to a per-litre price of NZ$3.78). At 30 June 2015 bulk wine stocks included in inventory were 853,895 litres at a cost of NZ$3.41 per litre. A small amount of this wine is likely to be retained by MWE to be aged and bottled at a later date. The Listing Document states that for FY16 to date MWE has sold approximately 770,000 litres of bulk wine. However, it is unclear whether all of this relates to bulk wine that would have been sold in FY15 if the price had been acceptable.

We have tested the reasonableness of the gross profit margin available for the distributor and retailer in China by taking published retail prices for a range of NZ and Australian bottled wines sold into China. Where sales data for China were not available, we have used adjusted sales prices from elsewhere in Asia and increased the prices by the ‘China premium’, which is the percentage difference between the sale price for a particular bottled wine in China and that for elsewhere in Asia (such as Hong Kong or Singapore). The gross profit margin for Penfolds Bin 28 Kalimna Shiraz is ~58%. The only cost data available for Oyster Bay is for the Asia/Pacific region, which includes Australia and New Zealand – highly competitive wine markets that are likely to be lower priced. The gross margin for Oyster Bay using the lower cost data is ~73%. For the O:TU brand, the margin available for wines sold for the list price on SIWE is 92% and 85% for wines sold to members at a discount of ~47%. No public data is available on the sale price of O:TU wines in other retail outlets in China, although we understand from management that the O:TU wines are targeted at the premium end of the wine market.

Exhibit 6: Comparative China wine sales – gross profits

Brand

Wine variety

Vintage

Market

Sales price bottle (NZ$)

China premium

Ave purchase price (NZ$/ bottle)

China gross profit margin

Data source

Penfolds

Bin 28

HK

24.9

Penfolds

Bin 28

China

35.1

41.0%

58%

Penfolds

Grange

2007

HK

550.0

Penfolds

Grange

2007

China

824.8

50.0%

Penfolds

ALL

14.8

Treasury Wine Estates Annual Report 2015 - Asia

Cloudy Bay

SB

2014

HK

53.9

Cloudy Bay

SB

2014

China

64.4

19.5%

Cloudy Bay

ALL

N/A

Oyster Bay

SB

2015

Singapore

20.6

Oyster Bay

SB

2015

China

29.0

Oyster Bay

ALL

7.68

73 %

Delegat Annual Report 2015 - Asia Pac inc Aust/NZ

Villa Maria

Prvt Bin SB

2014

HK

23.1

Villa Maria

Prvt Bin SB

2014

China

45.7

98.0%

Villa Maria

ALL

N/A

O:TU

SB

2013

143.7

11.55

92%

SIWE pricing (RMB 680), reduced to (RMB 360 for members which reduces the gross margin to 85%)

Source: www.wine-searcher.com. Note: The average purchase price of O:TU wines by GEL (related party distributor based in HK) is calculated as the average per litre export price for NZ white wine in 2015 of NZ$11.86 per litre plus 30% = NZ$15.40 per litre or NZ$11.55 per bottle.

Joint ownership structure

A key element of the marketing strategy is to involve MWE’s sales and distribution partners in China in the ownership of MWE by offering them modest parcels of shares that will be sold at the current price (for now the issue price is NZ$0.20 but in future the price will be the current NXT market price). We understand from management that small parcels of shares of about 100 shares per customer have been issued to around 400 customers in China.

MWE’s management believes that an important part of any sales proposition in China is to establish credibility and that a listing on NXT is part of establishing a long-term customer relationship. This relationship can be further cemented by aligning the interests of the distributors with the interests of MWE shareholders. At this stage we understand that no shares have been issued to MWE’s distributors or associates in China.

Growth strategy

MWE’s growth strategy includes:

Increasing the sales of bottled wine as it builds on its existing penetration of the China and other Asian markets.

Improving the yield in the existing 157ha vineyard.

Further planting, initially the 45ha of vineyard ready-land adjacent to the existing vineyard (work on irrigation is underway). The timing of the development of this land will be determined by the board’s assessment of supply and demand.

Reducing the amount of lower margin bulk grapes and bulk wine sold.

Expanding into other markets, initially the US, Japan and South Korea, and later into other markets including Australia and Europe.

Diversifying wine production into other varieties.

Negotiating supply arrangements with airlines and other travel market participants including duty-free shops in airports.

The board has identified opportunities for MWE to grow by acquisition through purchasing other vineyards or wine processing facilities in Marlborough and other wine regions of NZ.

Possible diversification into other NZ sourced food and beverage products.

The wine industry

According to Wine Institute, Global vineyard plantings in 2014 were 17,960 thousand acres (7,268 thousand hectares).8 NZ plantings were 88,000 acres (35,612 hectares)9 or 0.5% of global vineyard area. In 2014 the top five countries measured by vineyard area were Spain (13.0%), China (11.0%), France (10.4%), Italy (9.5%) and Turkey (9.9%). NZ was ranked No 32 on the World Vineyard Acreage table.10 USA is the largest consumer of wine (13.03% of world consumption in 2014)11 followed by France (11.29%), Italy (8.26%), Germany (8.18%) and China 6.4%.

1 acre = 0.404 hectares

www.wineinstitue.org

www.wineinstitute.org

www.wineinstitute.org

The chart below shows global vineyard plantings, wine production and consumption:

Exhibit 7: Global vineyard plantings, wine production and consumption

Global wine consumption per capita is forecast to grow the most in emerging wine consuming regions such as China. Euromonitor International’s forecasts for CAGR in wine consumption per capita over the five years from 2013 to 2018 are shown in Exhibit 8.

Exhibit 8: Forecast five-year CAGR in wine consumption in key growth regions and markets

CAGR 2013-2018

China

4.5%

Canada

1.6%

Spain

0.7%

USA

0.6%

New Zealand

0.2%

Russia

0.7%

France

(0.7%)

Germany

(0.8%)

Australia

(0.8%)

United Kingdom

(1.4%)

Italy

(2.6%)

China

Canada

Spain

USA

New Zealand

Russia

France

Germany

Australia

United Kingdom

Italy

CAGR 2013-2018

4.5%

1.6%

0.7%

0.6%

0.2%

0.7%

(0.7%)

(0.8%)

(0.8%)

(1.4%)

(2.6%)

Source: Euromonitor International, Treasury Wine Estates Annual Report 2015

The chart below contrasts the change in per capita in wine consumption in the US with the change in wine consumption in China. From 2007 to 2013 the CAGR in per capita wine consumption in the US was 3.14% compared with China where the CAGR in per capita wine consumption was 19.48%. In 2014 wine consumption in China fell from 1.28 litres per capita to 1.16 litres per capita mainly due to the economic slowdown in China.

Exhibit 9: US and China litres of wine consumed per capita and annual growth rates

Source: www.wineinstitute.org

In China the fastest-growing bottled wine categories are the cheapest and the most expensive, which supports MWE’s strategy to position its wines at the premium end of the market. This is illustrated with data on Australian bottled wine exports.

Exhibit 10: Bottled wine exports from Australia to China – 12 months ended 31 December 2015

<A$2.49

A$2.50-A$4.99

A$5.00 - A$7.50

A$7.50-A$9.99

A$10.0-A$19.9

A$20.0-A$49.9

>A$50.00

Total

China (000s litres)

4,585

30,236

10,277

3,634

4,816

1,405

607

55,558

World (000s litres)

16,059

219,364

41,926

16,489

16,907

3,549

2,140

316,434

China % increase

201%

62%

31%

51%

53%

72%

202%

55%

World % increase

38%

5%

16%

11%

30%

22%

58%

9%

Source: www.wineaustralia.com

NZ renowned for quality sauvignon blanc wines

With plantings in 2014 of 35,859 hectares, the NZ wine industry is only 0.5% of global production. The MWE 157ha planted vineyard represents 0.4% of the total NZ vineyard plantations. NZ has established an export industry that has almost tripled in value in the 10 years since 2006.

Exhibit 11: NZ wine industry

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Number of wineries

530

543

585

643

672

697

703

698

699

673

Number of growers

866

1,003

1,060

1,117

N/A

791

824

833

N/A

762

Production area (ha)

22,676

25,355

29,310

31,954

33,200

34,500

35,537

35,182

35,510

35,859

Average yield (tonnes/ha)

8.2

8.1

9.7

8.9

8

9.5

7.6

9.8

12.6

9.1

Average grape price (NZ$/tonne)

2,022

1,981

2,161

1,629

1,293

1,239

1,359

1,688

1,666

N/A

Tonnes crushed

185,000

205,000

285,000

285,000

266,000

328,000

269,000

345,000

445,000

326,000

Total production (millions of litres)

133.2

147.6

205.2

205.2

190

235

194

248.4

320.4

234.7

Domestic sales NZ wine (millions of litres)

50

51

46.5

59.3

56.7

66.3

64.6

51.7

49.9

61.9

Consumption per capita NZ Wines (litres)

12.1

12.2

11.1

13.9

13

15.2

14.7

11.6

11.2

13.7

Total domestic sales all wine (millions of litres)

86

91.8

87.4

92.7

92.1

93.9

91.9

92.5

90.1

96.3

Consumption per capita (all wines) litres

20.6

21.7

20.8

21.5

21.1

21.3

20.9

20.8

20.1

21.3

Export volumes (millions of litres)

57.8

76.0

88.6

112.6

142.0

154.7

178.9

169.6

186.9

209.4

Export value (millions of NZ$ - FOB)

512.4

698.3

797.8

991.7

1,041.0

1,094.0

1,177.0

1,210.0

1,328.0

1,424.0

Source: NZ Winegrowers Annual Report 2015. Note: FOB = free on board.

The Marlborough wine district of New Zealand accounts for 75% of the country’s total wine production12 and 79% of its wine exports. The region is renowned for producing sauvignon blanc wines, which account for some 86% of total wine production. The MWE FY17 forecast harvest of 1,544 tonnes (as per the FY17 KOM) is 0.5% of the last available data (2014) for total Marlborough wine production. Details of plantings are set out below:

www.wine-marlborough.co.nz

Exhibit 12: Marlborough wine district of NZ – production statistics

Growers

Wineries

Vineyard (ha)

Tonnes of grapes

Tonnes/ha

2007

530

104

21,200

120,888

5.7

2008

524

109

22,277

194,639

8.7

2009

556

130

23,600

192,128

8.1

2010

605

130

23,920

183,000

7.7

2011

600

142

23,964

244,893

10.2

2012

600

142

23,964

188,649

7.9

2013

568

148

22,587

215,680

9.5

2014

568

168

22,903

329,572

14.4

Source: www.wine-malborough.co.nz

Wines produced in the Marlborough region in 2014 show the sauvignon blanc variety is dominant:

Exhibit 13: Marlborough wine district of NZ – varietal plantings in 2014

Tonnes of grapes

(%)

Sauvignon blanc

282,608

85.8%

Pinot noir

18,940

5.7%

Chardonnay

11,530

3.5%

Pinot gris

10,670

3.2%

Riesling

3,044

0.9%

Other

2,780

0.8%

Total

329,572

100.0%

Source: www.wine-marlborough.co.nz

Awatere Valley region in Marlborough district

The MWE vineyards are in the Awatere Valley, which has been categorised as the coldest and driest part of the Marlborough district. Climatic classifications of the sub regions of Marlborough are set out below:

Exhibit 14: Marlborough wine district – sub regions

Sub regions

Temp

Moisture

Wairau Valley

Cool

Dry

Southern Valleys

Cooler

Dryer

Awatere Valley

Coolest

Driest

Source www.wine-marlborough.co.nz

The Awatere Valley has a more extreme climate than the other regions with strong winds, variable soils and temperatures and a later ripening season. One of the issues is the scarceness of irrigation water, which in a drier than normal season can limit vine growth. Berry sizes tend to be smaller with a more intense flavour, which gives the Awatere Valley wines their unique character.

Key operating milestones

MWE has set four key metrics by which investors should be able to assess performance:

Gross harvest, or grape production from the vineyards. This measure shows the vineyard’s grape supply capacity, which in the opinion of the board is sustainable for at least 15 years. Grape production is expected to increase as the vines mature and the board’s longer-term forecasts are for a gross annual harvest of 2,000 tonnes (5% annual growth rate). At a 5% growth rate of annual production, the current production of 1,401 tonnes should reach 2,000 in 2023. The KOM forecasts are for grapes produced from the existing vineyards and do not factor in future vineyard development where the time to full production could take five years. The FY16 harvest is expected to yield 1,660 tonnes. The previous forecast for 5% growth to 1,471 tonnes has been exceeded due to favourable climatic conditions. The FY17 forecast of 1,544 tonnes assumes normal growing conditions and is therefore 5% pa growth from the FY15 production baseline. FY16 has been treated as an exceptional year.

Bulk grape sales have been expressed in tonnes because of the difficulty in forecasting the price, which can vary materially depending on supply/demand factors. Bulk grape production as a percentage of the total harvest is expected to increase from 68% in FY15 to 74% in FY17. The tonnage of bulk grape sales is governed by how much of the harvest is put into bottled and bulk wines. It is MWE’s intention to increase bottled wine sales because they offer higher margins than grapes sold in bulk or grapes processed into bulk wine. An increase in the sale of bottled wines will mean a reduction in the amount of wine sold as bulk wine to other NZ wine producers.

International bottled wine sales, which management expects to double between FY16 and FY17, are underpinned by the minimum purchase requirements that form part of the distribution arrangements with related party GEL. In FY16 GEL is contracted to undertake minimum purchases of NZ$1.4m of bottled wine out of total international sales of NZ$1.6m; this rises to a minimum of NZ$3.0m of total international sales of NZ$3.2m in 2017. The minimum purchase requirements mean it would be very unlikely for the international wine sales KOM not to be met.

NZ bottled wine sales are expected to be driven by the Music Bay brand, launched in 2016. NZ wine sales accounted for 13.3% of total wine sales in FY15 and are expected to account of 6% of total bottled wine sales in FY17.

Exhibit 15: Key operating milestones defined by company

FY15 (pro forma)

FY16e

FY17e

Gross harvest (tonnes)

1,401

1,660

1,544

Bulk grape sales (tonnes)

955

1,190

1,144

International bottled wine sales (NZ$)

679,806

1,600,000

3,200,000

NZ bottled wine sales (NZ$)

104,407

137,293

205,940

Bulk grapes % of total harvest

68%

72%

74%

NZ wine sales % of total wine sales

13.3%

7.9%

6.0%

Source: MWE Listing Document, page 34, Edison Investment Research

Management

MWE has an experienced board and senior management team with knowledge and understanding of vineyard operations and Asian markets, particularly the China market.

Executive chairman Min (James) Jia is the founder holds 82.6% of the issued shares. James is an experienced property developer and has held real estate, vineyard and forestry assets in NZ and China. He is active in property development in Auckland, NZ. Min (James) Jia purchased the Otuwhero Estate and Donaldson’s Block and associated vineyard assets in April 2013 for NZ$13.1m. These assets together with the distribution agreements were sold to MWE for 240m shares, which at a value of NZ$0.20 per share valued his interests at NZ$48m. James sold 47.7m shares into the float (at NZ$0.20 per share) to assist with achieving a greater shareholder spread. He is paid NZ$120,000 pa for his role as executive chairman. James has a Bachelor’s degree in engineering and a Master’s in business administration.

Ly (Lily) Lee is married to Min (James) Jia. She is an experienced property developer both in NZ and China and in the 1990s established a large travel agency in Germany. She is the general manager of Shanghai Aufun Investment Consultancy, which helps Chinese investors invest offshore. Lily holds a bachelor’s degree in language and is paid an annual director’s fee of NZ$40,000.

Jack Zhong Yin holds a bachelor’s degree in business studies and a master’s in taxation studies. He is a member of the NZ Institute of Directors and is a registered financial services provider (FSP). Jack is the head of Asian Development for DFK Griffiths Carlton, an Auckland-based accountancy firm, and has extensive management and investment advice experience. He is an executive director and is paid an annual directors fee of NZ$50,000.

Danny Chan is an independent director and holds a bachelor’s degree in commerce and administration. He holds directorships in Academic Colleges Group, Abano Healthcare, Farmers’ Mutual Group, Flowerzone International and Auckland Tourism Events and Economic Development. He is also a member of the Department of the Prime Minister and Cabinet’s China Project Advisory Group, the NZ/China Advisory Council and NZ Markets Disciplinary Tribunal.

Songyuan (Benny) Huang is an independent director and heads up global margin lending business KVB Kunlun NZ. He holds a bachelor’s degree in accounting, a master’s degree in international business and is a chartered financial analyst. He is also a member of the NZ Institute of Directors and is paid an annual directors fee of NZ$30,000.

Senior staff include Catherine Ma (bachelor’s degree in commerce) as group CEO, Eric Li (bachelor’s degree in commerce) as financial controller and Jan Kux, a winemaker with 20 years’ experience in Europe and NZ. Jan is a member of the GESCO Society for the Sciences and Development of Viticulture and is an active member in the German Sommelier Association.

Sensitivities

MWE is exposed to primary production risk, which includes climatic conditions and the impact of disease and pests. It is also exposed to the global supply/demand dynamics.

Distribution agreements with related parties – management advises that the terms of the agreement with related party GEL and Min (James) Jia-owned NZIT have been negotiated on an arm’s length basis. The sale of O:TU premium wines to these two distributors has been set at a premium to the average NZ white wine FY15 export price of NZ$11.86 per litre. The Listing Document (page 8) states that the premium is “dependent on MWE brand and varietal but that most of range is priced at a premium of 30% or more”. The GEL agreement can be terminated on 90 days’ written notice by either party. The loss of this agreement could place MWE at a disadvantage in the China market, however, management believes that acceptable alternative distribution agreements could be put in place with little or no impact on MWE’s market position in China.

Grape supply – all grapes are sourced from MWE’s vineyards. A reduction in the supply of high-quality grapes could limit MWE’s wine and bulk grape revenues.

Viticulture management – MWE engages experienced viticulturists and has put in place strategies to mitigate against the effects of frost, diseases, pests and birds. It has also developed dams to provide a water supply during the dry summer months.

Quality issues – it is possible that the wine harvesting and winemaking processes result in a reduction in quality of the finished product thus affecting product reputation, costs and future sales. The current dispute with the Ministry for Primary Industries (MPI) is an example of a dispute arising from the production process that could lead to a significant liability. See below for additional information on this dispute.

Size and market position – MWE is a relatively small boutique producer of premium NZ white wines and is in competition with much larger producers of white wine from the Marlborough region and other regions of NZ as well as producers from Australia, France, Italy, Spain, Chile and other large wine-producing countries. To provide some perspective, NZ-based listed wine company Delegat sold 2.2m cases of wine in FY15 and MWE sold 6,587 cases.

Key man risk – Min (James) Jia is the executive chairman, founder and owner of the Otuwhero Estate vineyard assets from April 2013. He is also the key to distributing bottled wines in China through related party distributors GEL and NZIT.

Premium white wine market in China – this is not as well established as the premium red wine market and there is a risk the market may not develop as quickly or extensively as MWE anticipates, which could affect sales revenues. However, in FY16 and FY17 the minimum purchase requirements under the related-party distribution agreements underpin between 87.5% and 93.8% of expected international bottled wine sales in FY16 and FY17.

Bulk grape purchase agreements – the current agreements expire after the FY17 harvest. New agreements need to be put in place and there is a risk they could be struck on less favourable terms than the existing agreements.

Processing agreement – MWE is reliant on a third-party processor for producing bulk and bottled wine. Any change to or termination of this agreement could have an adverse effect on the quantity and quality of wine available for sale.

Shanghai International Wine Exchange (SIWE) – only wine producers can make sales on the SIWE. NZIT (owned by Min (James) Jia) supplies wine to SIWE but the contract risk lies with MWE as the producer, which means MWE has provided a NZ$4.4m performance bond. MWE has an obligation to redeem wine not sold by SIWE at 102.5% of the original price. The current offering of O:TU wines on SIWE is 27,900 bottles of 2013 sauvignon blanc with a selling price of 680 yuan per bottle (NZ$143.72/US$103). Management advises that members (shareholders of MWE under the Joint Ownership scheme) receive a discount on wine purchased on SIWE and are able to purchase the wine at RMB360 per bottle. An NZ company owned by Min (James) Jia has novated the liability that MWE has to ICBC and has also provided an indemnity to MWE, which extinguishes all other liabilities that MWE may have under its contractual relationships with SIWE.

Dependence on the China market MWE intends to develop markets outside China, in the US, Japan, South Korea, Australia and Europe. For FY15 (pro-forma) management advises that 76% of MWE’s exports were to China and Hong Kong.13

Listing document, page 31

Currency – sales to China and other international markets expose MWE to currency risks. MWE does not have a hedging policy in place.

SWOT analysis

Exhibit 16: Strengths, weaknesses, opportunities and threats

Strengths

Weaknesses

Vineyard not yet mature, therefore production +500 tonnes by 2023

Liquidity risk: free float of ~10%

Vineyard expansion on 45ha vineyard-ready land

Dependence on related party distributors in China

Additional land for further vineyard development

Reliance on China/HK market (76% of revenue in FY15)

Wine listed on Shanghai International Wine Exchange

Bottled wine KOM met via minimum purchase requirement from related distributor

Wine served on China Airlines flights

No contract for bulk grape sales beyond FY17

O:TU wines have won international awards

Related party perception issues

Marlborough sauvignon blanc wines synonymous with quality

Small player in NZ sauvignon blanc market

Established distribution network in China through related party distributors

Small player in global wine market

 

Gross margin of ~19% (FY15 PF)

Opportunities

Threats

Expansion to new markets

Ministry of Primary Industries dispute (NZ$1.2m stock impairment is possible)

Development of new grape varieties and wine styles

Breach of Overseas Investment Office consent ruling

Acquisitions

Quality issues

Investment in other NZ sourced food and beverage products

Exchange rate risk (76% of sales to China and HK)

Improve gross margin by increasing bottled wine sales

 

Strengths

Vineyard not yet mature, therefore production +500 tonnes by 2023

Vineyard expansion on 45ha vineyard-ready land

Additional land for further vineyard development

Wine listed on Shanghai International Wine Exchange

Wine served on China Airlines flights

O:TU wines have won international awards

Marlborough sauvignon blanc wines synonymous with quality

Established distribution network in China through related party distributors

 

Opportunities

Expansion to new markets

Development of new grape varieties and wine styles

Acquisitions

Investment in other NZ sourced food and beverage products

Improve gross margin by increasing bottled wine sales

Weaknesses

Liquidity risk: free float of ~10%

Dependence on related party distributors in China

Reliance on China/HK market (76% of revenue in FY15)

Bottled wine KOM met via minimum purchase requirement from related distributor

No contract for bulk grape sales beyond FY17

Related party perception issues

Small player in NZ sauvignon blanc market

Small player in global wine market

Gross margin of ~19% (FY15 PF)

Threats

Ministry of Primary Industries dispute (NZ$1.2m stock impairment is possible)

Breach of Overseas Investment Office consent ruling

Quality issues

Exchange rate risk (76% of sales to China and HK)

 

Source: Edison Investment Research

Other legal issues

There is a dispute between the Ministry for Primary Industries (MPI) and MWE’s former contracted wine processor. MWE is not a party to the ongoing dispute involving the origins of NZ$1.2m of bottled wine that the MPI alleges it cannot trace. If the MPI’s position is upheld, the wine will be destroyed. MWE is in discussions with its insurer, however, there is no guarantee that its insurance policy will cover this potential loss. MWE may have a claim against the processor. A worst case outcome is that MPI’s position is upheld, the wine is destroyed, there is no cover under MWE’s insurance policy and a claim cannot be made against the processor. The result would reduce bottled wine inventories by NZ$1.2m, which would see inventories as at 30 June 2015 restated at NZ$5.0m and an impairment charge against profits of NZ$1.2m. The directors have not made an impairment charge; the outcome is expected within six months.

O:TU Investments (OIL) obtained consent from the Overseas Investment Office (OIO) to acquire the Otuwhero vineyard, Donaldson’s Block and associated assets in April 2013. However, the restructure undertaken in preparation for a NXT listing inadvertently breached the consent because it increased Min (James) Jia’s interest by 3%. MWE became aware of this breach and in December 2015 lodged a retrospective consent application. The OIO remedies available are a fine (up to NZ$100,000), a penalty (up to NZ$300,000) and, in the worst case, selling down or disposing of some of the land.

Financials

MWE was incorporated on 18 March 2015 and audited financial statements are available for the period from incorporation to 30 June 2015. MWE has also prepared pro forma accounts for the 12 months ended 30 June 2015 to include the restructure as if it had taken place on 1 July 2014. These financial statements have not been audited.

Earnings

Because of a decline in the price of bulk wine, in 2015 MWE decided to hold bulk wine stocks until prices increased. This meant that sales of bulk wine that would normally have been made in FY15 were made in FY16. Management advises that at the date of the Listing Document in FY16 it had sold 770,000 litres of bulk wine. No details were provided of the price received. Under normal pricing conditions, it would be reasonable to expect that bulk wine would be sold in the year of production.

The income statement for 2015 does not include amortisation of intangibles. Future years’ profits will be reduced by an amortisation charge of NZ$515,315, which is based on the provisional useful life of the distribution rights of 10 years.

Exhibit 17: Income statements for 2015

NZ$

Actual FY15

% sales

Pro forma FY15*

% sales

Pro forma FY15 **

Comment

Sales

1,840,189

100.0%

2,414,175

100.0%

2,800,365

Sales + other + int income

Cost of goods sold

(1,583,185)

(1,956,231)

Gross Profit

257,004

14.0%

457,944

19.0%

Cash operating expenses

(298,495)

(885,255)

Other revenue

24,529

1.3%

373,514

15.5%

EBITDA

(16,962)

(53,797)

1,013,564

EBIT + Depn

Depreciation

(105,918)

(351,213)

EBIT before fair value adjustment

(122,880)

(405,010)

662,351

Inc Fair Value Adj

Fair value adjustment

1,054,685

57.3%

1,054,685

43.7%

Net interest

(91,499)

(387,610)

NPBT

840,306

45.7%

262,065

10.9%

Income tax

(250,266)

(92,454)

NPAT

590,040

32.1%

169,611

7.0%

169,611

EBIT less Int paid & Tax

Source: MWE data. The actual FY15 audited is for the period from incorporation (18 March 2015) to 30 June 2015. Pro forma FY15 (unaudited) is for the 12 months. Note: Pro forma FY15* is as per the unaudited financial statements and Pro-forma FY15** is as set out on Page 33 of the Listing Document

Fair value adjustments

NZ IFRS require certain assets to be stated at fair value rather than at historic cost. All movements in these fair values are reflected in and impact the Statement of Financial Performance. The assets affected are:

biological (vines); and

harvest provision release where inventory is valued at market value rather than costs incurred in the harvest process.

In 2015 the fair value adjustments resulted in additional gain of NZ$1.054m. According to management, this is offset by an increase in cost of goods sold of NZ$1,054m less biological asset adjustment of NZ$0.213m. According to the Listing Document (page 33), MWE has incurred an EBIT profit of NZ$0.6m or net profit after tax of NZ$0.2m for the year to 30 June 2015 (pro forma).

Balance sheet

Interest-bearing liabilities of NZ$6.1m are shown as current at 30 June 2015 because, as stated in the audited financial statements, the loan with ICBC was due to mature on 17 December 2015 and the intention was to apply for the loan to be refinanced for a two-year period. Management advises that this loan has been extended to 22 September 2016 and a new facility will be renegotiated after the NXT listing is complete.

Exhibit 18: Balance sheet as at 30 June 2015

NZ$

Comments

Current assets

Cash

988,556

Accounts receivable

1,195,961

68 days

Inventory and WIP

6,234,378

~1,050,000 litres wine

Prepayments

23,775

GST receivable

441,616

Total current assets

8,884,286

Non-current assets

Property plant and equipment

13,812,633

Purchased from Min (James) Jia

Related party loan

13,945

Investments (at cost)

72,250

Loan – Blind River Irrigation

Deferred tax

153,276

Intangible assets

5,153,450

Distribution rights – 10-year life

Total non current assets

19,205,554

Total assets

28,089,840

Current liabilities

Accounts payable

232,553

Accrued expenses

32,037

GST payable

374,783

Income tax

496,679

Interest bearing borrowings

6,100,000

Interest only 6.79% - expires 22 September 2016

Shareholder loan

70,632

Total current liabilities

7,306,684

Net assets

20,783,156

Equity

Share capital

15,000,226

85% owned by founders

Retained earnings

5,782,930

Total equity

20,783,156

Source: MWE Audited Financial Statements 18 March 2015 to 30 June 2015

Cash flow

Cash flow from operations is negative, mainly because FY15 did not include sales of bulk wines that were deferred until FY16 due to weak market pricing.

There have been no dividends paid and the board has not yet set a dividend policy.

Exhibit 19: Cash flow – 18 March 2015 to 30 June 2015 (NZ$)

Net cash flow from operations

(307,857)

Fixed asset purchases

(2,825)

Disposal of assets

2,900

Cash acquired on acquisition of subsidiaries

888,711

Cash from shareholder advances

396,524

Net change in cash

977,453

Exchange adjustment

11,103

Cash at end of period

988,556

Net cash flow from operations

Fixed asset purchases

Disposal of assets

Cash acquired on acquisition of subsidiaries

Cash from shareholder advances

Net change in cash

Exchange adjustment

Cash at end of period

(307,857)

(2,825)

2,900

888,711

396,524

977,453

11,103

988,556

Source: MWE Audited Financial Statements as at 30 June 2015

Valuation

MWE is a young company that reported a NPAT of NZ$0.59m for the period from 18 March 2015 to 30 June 2015. The unaudited pro forma NPAT for the 12 months ended 30 June 2015 was NZ$0.170m. Management expects that as production volumes ramp up and sales of bottled wines increase from NZ$0.78m in FY15 to the company’s KOM estimate of NZ$3.4m in FY17 that profitability will increase significantly. MWE has not provided any forecast material other than the KOMs.

Sensitivity analysis

We have undertaken a sensitivity analysis using the company’s KOMs and a set of our assumptions to illustrate in Exhibit 21 the improved margin that could be achieved by selling increased quantities of higher margin bottled wine and reducing the amount of lower value bulk wine sales. For the purpose of this sensitivity, we have excluded other revenue and fair market value adjustments. This sensitivity analysis is not meant to be a forecast and has been provided to illustrate the impact of increasing production and changing product mix. Our sensitivity analysis shows cash-based gross margin could increase from 53.8% in FY15 to 58.0% in FY17 if all KOMs and our pricing and cost assumptions are met.

In our sensitivity analysis, we have assumed an increased cash cost of goods sold (per litre produced) because of increased volumes of bottled wines, which will include not only the crushing costs but the costs associated with winemaking and bottling. Details of assumptions and their sources are included in the table below.

Exhibit 20: Assumptions used to in gross profit margin (cash basis) sensitivity analysis

Assumptions

FY15
(pro forma)

FY16e

FY17e

Tonnes of grapes

Bulk grapes (from KOM)

955

1,190

1,144

Bottled wine (tonnes grapes) (from KOM using 750 litres per tonne grapes)

79

150

295

Bulk wine sales (tonnes grapes) (derived by taking KOM for grapes produced and deducting grapes sold as bulk grapes and grapes crushed to product bottled wine)

367

320

105

Gross harvest

1,401

1,660

1,544

Price of bulk wine per litre (NZ$) (Actual for FY15; $4 .00 per litre assumed from FY16e and 2% increase for FY17e)

3.78

4.00

4.08

Bulk grape sales (per tonne) (NZ$) (Actual for FY15 and 2% increase pa for FY16e and FY17e)

1,707

1,741

1,776

Total litres (inc bulk grapes conv to litres)

Bulk grapes in litres (750 litres per tonne)

716,250

892,500

858,000

Bottled wine in litres (750 litres per tonne)

59,008

112,811

221,165

Bulk wines in litres (750 litres per tonne)

None sold

23,969

7,884

Total litres

775,258

1,029,280

1,087,048

Cash COGS (excluding fair value adjustment) per litre (NZ$) sold (FY15 actual, FY16e and FY17e we have increased costs to allow for additional costs associated with the increase in the volume of bottled wine)

1.43

1.70

2.10

Operating cost increases assumed (to allow for increased costs associated with the increase in the volume of bottled wine sold)

5.0%

5.0%

Source: MWE Audited Financial Statements as at 30 June 2015, Listing Document, June 2016, Edison Investment Research for assumptions made on prices for bulk wine and bulk grapes and for increases in COGS and operating costs.

Exhibit 21: Sensitivity analysis for gross margin (cash basis) improvement from product mix change

NZ$

FY15
(pro forma)

FY16e

FY17e

Sales

Bottled wine (from KOM)

784,213

1,737,293

3,405,940

Bulk grapes (from KOM and pricing assumptions in Exhibit 20)

1,630,185

2,071,957

2,031,701

Bulk wine (quantity derived by taking KOM for grapes produced and deducting grapes sold as bulk grapes and grapes crushed to product bottled wine; pricing assumptions in Exhibit 20

-

1,278.34

428.86

Total revenue

2,414,175

3,810,528

5,438,070

Cash cost of goods sold* (excluding fair value adjustment) (FY15 actual, FY16e and FY17e we have increased costs to allow for additional costs associated with the increase in the volume of bottled wine, see Exhibit 20)

1,114,513

1,749,776

2,282,802

Gross profit margin (cash basis)

1,299,662

2,060,752

3,155,269

Gross margin (cash basis) %

53.8%

54.1%

58.0%

Operating costs (refer to assumptions in Exhibit 20)

885,255

929,518

975,994

Cash base EBITDA (excluding "other revenues")

414,407

1,131,234

2,179,275

Other revenue

373,514

Unknown

Unknown

Fair value adjustment

1,054,685

Unknown

Unknown

Depreciation

(351,213)

(351,213)

(351,213)

Amortisation

(515,345)

(515,345)

Source: MWE Audited Financial Statements as at 30 June 2015, Listing Document, June 2016, Edison Investment Research. Note: FY15 PF cash cost of goods sold excludes non-cash items totalling NZ$841,718 comprising a change in fair value of agricultural produce and inventories of biological assets as advised by management. This non-cash adjustment has reduced costs of production from NZ$1,956,231 as shown in the unaudited financial statements to NZ$1,114,513 on a cash basis.

Valuation methods

Where there is sufficient information available, fundamental valuations are undertaken using discounted cash flow analysis or other methods such as the dividend discount model or the Gordon’s growth model. To provide a valuation reference for MWE we have looked at how the market is pricing comparable companies.

There are two listed peers in the NZ/Australian market. Both companies are well established and are substantially larger than MWE and are therefore of limited relevance. Treasury Wine Estates is not considered to be a relevant peer because of its diversified product range, its global spread and its size which is 123x the market capitalisation of MWE.

Exhibit 22: Comparable company analysis

Company

Currency

Market cap (m)

2016e P/E (x)

2017e P/E (x)

2018e P/E (x)

2016e EV/EBIT (x)

2017e EV/EBIT (x)

2018e EV/EBIT (x)

2016e yield (%)

2017e yield (%)

2018e yield (%)

Australian Vintage

A$

143

17.6

15.0

-

13.9

12.2

2.8

3.2

Delegat Group

NZ$

645

17.7

15.7

13.7

14.4

12.5

11.1

1.8

2.0

2.2

Average

17.6

15.3

13.7

14.1

12.3

11.1

2.3

2.6

2.2

Treasury Wine Estates

A$

7,160

32.1

25.4

22.0

20.3

15.0

13.3

2.0

2.7

3.1

Source: Bloomberg. Note: Price at 23 June 2016. All companies have a 30 June year end.

Due to lack of meaningful profit forecasts, we have also looked at EV/sales ratios, have included Foley Family Wines and used historic multiples as a reference point. If we assume that the Delegat and Foley Family Wines multiples (see Exhibit 23) are the most appropriate then MWE sales would need to increase from current levels of NZ$2.4m to between ~NZ$16m and ~NZ$21m (assuming EV/sales multiples of between 3.0x and 4.0x). The EV used for MWE is NZ$64m. comprising the implied market capitalisation of NZ$58.7m plus net debt of NZ$5.1m as of June 2015.

Exhibit 23: EV/sales multiples – peer group

Currency

Market cap (m)

2015 (x)

2016e (x)

2017e (x)

Australian Vintage

A$

143

0.8

1.0

0.9

Delegat Group

NZ$

645

3.0

3.8

3.4

Foley Family Wines

NZ$

82

3.3

N/A

N/A

Treasury Wine Estates

A$

7,160

1.8

2.6

2.2

MWE*

NZ$

58

26.5

Source: Bloomberg. Note: Priced at 23 June 2016. *MWE implied market cap based on the latest private placement of NZ$0.20 per share and 293.3m shares. Sales for FY15 are based on unaudited pro forma financial statements for FY15.

Shareholders

MWE’s share register is tightly held, with 82.6% held by executive chairman and founder Min (James) Jia. A further 7.8% is held by Li Zhong Wang, taking total holdings by substantial shareholders to 90.5%. The escrow arrangements entered into by Min (James) Jia, and associated entities are as follows:

90% of the shares must be held until 31 December 2016;

75% of the shares must be held until 30 June 2017; and

65% of the shares must be held until 31 December 2017.

Exhibit 24: Shareholdings

Position

No of shares

Holding

Min (James) Jia

Founder

251,117,014

82.6%

Li Zhong Wang

Substantial shareholder

22,980,906

7.8%

Jack Zhong Yin

Executive director

1,500,000

0.5%

Danny Chan

Non-executive director

75,000

0.0%

Benny Huang

Non-executive director

75,000

0.0%

Eric Li

Financial controller

9,100,000

3.1%

Other shareholders

8,424,080

5.9%

Total shareholders

293,272,000

100.0%

Source: MWE Listing Document, page 24

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Athersys — Update 30 June 2016

Athersys

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