Should You Buy A2 Milk Shares at This Price?

What happened to the A2M share price?

A2 Milk Company Ltd (Australia) [ASX:A2M] saw a strong reversal in its share price in trading today. The stock has suffered a steep fall over the past five days, with today’s reversal come as a boost to investors. The stock rose by 2% by 3:00pm AEST in afternoon trading.

Why did A2M shares do this?

The biggest problem that has emerged for companies such as Blackmore Limited [ASX:BKL], Bellamy’s Australia Ltd [ASX:BAL] and a2 is the proposed regulations from the Chinese government. The Chinese government essentially seeks to ‘tax’ the lucrative import business in products such as milk and supplements. That should have a visible impact on the results of Australian exporters such as a2.

Investors should accept the fact that there will be more requirements in licensing and listing. There is also a sharp focus on regulating e-commerce trade in the products I mentioned above. The proposed taxation is an 11.9% tariff on all foodstuffs imported into China.

Why is China trying to do this? It’s because trade has become so large and lucrative that the government feels it needs to sink its teeth in the matter. Many market analysts have mentioned regulatory risk as a concern for companies such as a2. They are absolutely right. Remember that this sort of regulatory risk is not isolated to China; they are present in all countries.

The views of companies such as GoConnect [ASX:GCN] and Go Green Ltd (which get a favourable tax treatment by the Chinese government) have an entirely different view.
Richard Li, the Executive Chairman of GoConnect, told me:

‘Just as I told Andrew Robb recently, Australian companies exporting goods to China is making life difficult for themselves because they are competing with the Chinese in these products. Instead, Australia should focus on exporting marketing services which they are very good at. But this is not even listed in the literature that Austrade has been distributing to promote the Free Trade Agreement with China.’

What now for A2M?

I believe the proposed regulations will go ahead. As the details will be adjusted and negotiated, I don’t believe the regulations will ‘kill’ the businesses completely. There will be a shock to stocks such as a2 at first, but fundamentals will kick in after that to support prices.

I believe ‘buying the dip’ will be a good idea for China-exposed stocks such as a2. If you are in a long position already, you may want to buy more at the dip. If you are a new investor, you want to get in at the dip.

Usually, the market prices-in information before it occurs (unless it’s unexpected information). The market is likely pricing-in the information right now. You may want to closely observe a2 in the coming weeks before doing anything.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

Join Money Morning on Google+

At Money Morning our aim is simple: to give you intelligent and enjoyable commentary on the most important stock market news and financial information of the day - and tell you how to profit from it. We know the best investments are often the hardest to find. So that's why we sift through mountains of reporting, research and data on your behalf, to present you with only the worthwhile opportunities to invest in.

Become a more informed, enlightened and profitable investor today - by taking out your free subscription to Money Morning now.

Money Morning Australia