A2 Milk’s Share Price Falls as China Hints at Further Regulatory Change

The major infant food and formula producers on the ASX have fallen again this week, with The a2 Milk Company Ltd [ASX:A2M], Bellamy’s Australia Ltd [ASX:BAL] and Clover Corporation Ltd [ASX:CLV] all facing increased market pressure.

At time of writing, shares in a2 Milk sit at $12.25 (down 3.85%), Bellamy’s at $8.60 (down 2.05%) and Clover at $1.59 (down 2.93%).

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Why are Infant formula exports, like A2 Milk’s share price doing so well?

Although they are facing a turbulent market, the biggest infant formula stocks have made significant gains over the last five years.

As one of the best growth stocks on the ASX, a2 has experienced massive progress thanks in large part to the demand for their infant formula in China. Over a five-year period, the formula and dairy company have made gains just over 562%.

Today’s price drop for a2 has been driven by delays experienced by NZ exporters — at ports in China. It’s unclear at this stage why this occurred, given recent changes to regulations which have mostly benefitted companies like a2 and others.

Similarly, Bellamy’s has increased its share price over 640% since their original listing in 2014. Much like a2, Bellamy’s are pushing toward higher sales on the Asian market, but Citi Group has warned that China could again change their rules for overseas sellers of infant formula, which could weaken their overall standing.

Clover Corp, which has also benefitted from improved product regulations within China, has been one of the group’s best performing small-caps, with sales last year contributing to a 250% rise in their share price over a 12-month period.

CVL’s stock price has surged 23% since May last year, which like brands like a2 and Bellamy’s are profiting from the premiumisation of formula in China.

What’s next for A2 Milk and other exports?

In the long-term, it’s possible for these stocks to continue to make gains, but there are still risks coming from the changing regulations for infant formula in China, with fears that local producers will soon benefit over overseas companies.

In a contradictory note, analysts at Citi also forecast that China could own 53% of the market by FY2022. This is despite the fact that recent regulation changes have made it easier for these players to make an entry into the Chinese market on the back of the premiumisation effect.

Increased stability in China has allowed ‘Australian listed companies to plan ahead and seek partnerships and distribution,’ says Paul Jensz of PAC Partners.

How profitable you see these shares to be will depend on the way you see the risk posed by China, which could easily weaken their position.

On the other hand, there is room to move further into the US market — something which could potentially offset trade problems down the line.

Back home, a2 has particularly strong market presence in the ANZ region for its dairy products.

Given the amount of players in infant formula — which continues to grow with names like Keystone Dairy Corporation Ltd [ASX:KTD] — investors may not only be looking at regulatory shocks from China but rather the increased competition at home.


Ryan Clarkson-Ledward,
For Money Morning

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Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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