Hong Kong, Sep 14 - Western connoisseurs once derided Chinese as simple drinkers who mixed wine with soda, and saw the country's top vintners such as Dynasty as local oddities serving up cheap wines in an immature market.
But a growing number of converts -- investors among them -- say China could become the industry's next Chile: a font of quality and affordable wines.
Dynasty, Changyu and Great Wall, made by a subsidiary of China Foods, control roughly half of China's grape wine market. They are angling to replace local preferences for beer and grain alcohol in a country where international wines still have a small, albeit fast growing, presence.
Though a near-term sales slowdown is possible as U.S. woes fan out across the world, analysts say long-term prospects for China's homegrown wines are strong as disposable incomes surge and the country's booming middle-class demands healthier and ritzier lifestyles.
"It should be a gradual process," Shanghai-based Credit Suisse analyst Shanshan Lu told Reuters.
"The key opportunity comes from the low base, and the key challenge should be competition from foreign brands that are imported into the China market."
International spirit and wine behemoths Diageo and Pernod Ricard are also aggressively expanding in the world's fastest growing major economy, but are focusing on high-end whisky brands such as Johnnie Walker and Chivas Regal.
China's wine industry is expected to grow to roughly $13.7 billion in 2010, up from $10.5 billion in 2007, according to research from Euromonitor, and experts say it could be the world's eighth largest wine consumer by 2012.
Grape wine, however, is still a small portion of China's market. Non-grape varieties such as yellow wine and rice wine will still account for almost two-thirds, or $8.8 billion, of the market in 2010, Euromonitor says.
By comparison, the global wine market was worth $234.7 billion in 2007, with "still light grape wine" accounting for $164.2 billion of that market, Euromonitor says.
Ninety percent of grape wine consumed in China is red, which unlike white wine is considered a symbol of class and luxury. But even with such an image, Chinese wines are relatively cheap, averaging less than $3 a 750 ml bottle.
Shares in Chinese vintners have also gotten cheaper after steep falls this year and now trade roughly in line with much larger global peers. Dynasty trades at 10.1 times forward earnings, and COFCO's China Foods trades at 17.4. That compares to Diageo's 15.6 times, and U.S. giant Constellation Brands' 16.1 times.
NEAR-TERM UNCERTAINTY
Despite strong long-term prospects, China's consumer firms are struggling now to pass costs on to customers in a year inflation hit 11-year highs, even as incomes rise.
On Wednesday, Dynasty -- 27 percent owned by French wine and spirits group Remy Cointreau -- said volume sales for 2008's first half rose by less than 1 percent to just shy of 30 million bottles, citing keen competition and poor sentiment after floods and a massive earthquake rocked China this year.
ABN AMRO, however, has a "buy" on Dynasty, citing increased sales prices and the company's commitment to improve its marketing and distribution capabilities.
Rival Great Wall -- which controls 15 percent of the market and was an official supplier to Beijing's 2008 Olympics -- is seeing stronger demand.
Its sales rose 92 percent to 94,000 tonnes last year, yielding a 19 percent increase in turnover to HK$2.14 billion, according to CIMB-GK.
Lehman Brothers has an overweight rating on Great Wall owner China Foods, which is backed by state behemoth COFCO.
And dominant player Changyu -- partly owned by Italian liqueur maker Illva Saronno and the World Bank's International Finance Corp -- saw revenue leap 27 percent to roughly 1.8 billion yuan in the first half of 2008 on the back of a gross margin of 67 percent.
FANCY FOREIGNERS
Further out, there are fears foreign wines could eventually beat China's vintners on their home turf as tastes expand among a burgeoning middle class.
Wine imported into the country leapt more than 19 percent to 163,600 tonnes in 2007, according to UBS, and the segment is growing faster than domestic wine.
But contrary to popular perceptions, foreign wines have not penetrated China as deeply as other international luxury items such as BMWs and Louis Vuitton leather goods
"Considering that wine makes up 5 percent of alcohol consumption and imported wine makes up not more than 6 percent of wine consumption, I do not see imported fine wines eclipsing the big domestic brands anytime soon," said Don St. Pierre Jr., Managing Partner of China-based wine importer ASC Fine Wines.
Still, for China's richest, the lure of the world's most famous wines is too strong to resist, no matter how high the price tag.
In March 2007, for example, a Chinese oenophile bought carry-on wine and spirits worth a record 23,000 euros at a Paris airport's duty-free shop -- including a bottle of epic 1945 Chateau Mouton Rothschild red wine costing 13,800 euros, airport officials said.