Production is rising, and some companies have already tapped the equity markets, giving investors a chance to make a play on the sector ahead of expected consolidation.

``Demand for wine will continue to grow by double digits for the next few years,'' said Belle Liang, the head of the China Research Unit with Core Pacific-Yamaichi.

To be sure, China's wine market is small. It was worth about US$896 million (HK$7 billion) last year, according to China Wine Online, an Internet-based beverage publication.

But production is steadily increasing, doubling to 400,000 tons in 2004 from 190,000 tons in 1994, according to data from Macquarie Research.

By comparison, production of the traditional baijiu, a strong white spirit that traditionally accompanies Chinese banquets, declined to 3.3 million tons from 6.9 million tons over the same period.

The top three Chinese winemakers by market share are Dynasty Fine Wines and Cofco International - both listed in Hong Kong - and Yantai Changyu Pioneer Wine, which is listed on the Shenzhen stock exchange.

The share prices of Dynasty and Cofco declined in the early summer, offering a buy opportunity as suggested by their respective price-earnings ratios compared with other beverage shares.

Cofco, whose leading brand is Great Wall Wines, has a PE of 19.59.

By comparison, China's largest brewery Tsingtao Brewery has a PE of 33.08; Beijing Yanjin Brewery has a PE of 23.6 and Chongqing Brewery has a PE of 33.19.

Dynasty shares rose 39 percent on their debut in February, but observers note that their current PE is still a comparatively low 14.44.

The company is a joint venture between Tianjin Development Holdings and Remy Cointreau of France. Analysts are more cautious on Changyu, a winery in Shandong Province. With a PE ratio of 32.08, the stock price may already reflect the company's value, they said.

``Changyu has good potential for growth in the medium to long term but the current share price is already at a reasonable range,'' said Shen Zhengming, an analyst with Orient Securities in Shanghai.

Changyu's shares closed Thursday at 17 yuan (HK$16), compared with 12.79 yuan on December 31.

The three key players, which have a combined market share of 65 percent, dominate a fragmented industry with plenty of room for consolidation.

Companies ready to expand upmarket, such as Dynasty, will soon have to decide whether to take over a smaller competitor, team up, or be bought, analysts said.

``M&A [mergers and acquisitions] will be the key theme in the China wine industry going forward,'' said Core Pacific-Yamaichi's Liang.

In one such transaction, Illva di Saronno, the Italian producer of Amaretto di Saronno liqueur, this year paid 481 million yuan for a 33 percent stake in Changyu.

Also this year, the International Finance Corp, the investment arm of the World Bank, agreed to take a 10 percent stake in the state-owned parent company of Changyu for 145.9 million yuan.

Meanwhile, Cofco is ``exploring possibilities for cooperation with foreign wineries to generate greater profit,'' the company said.

Smaller winemakers such as Suntine International Economic-Trading are also looking to expand operations.

``We are in talks with both local and overseas investors to set up a joint venture company,'' said Jiang Momai, Suntine brand promotion manager.

Foreign partners are welcomed by Chinese winemakers because they can provide expertise and experience.