Bubs Share Price Up on Strong Quarterly: Why it may Fizzle (ASX:BUB)

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At time of writing, the share price of Bubs Australia Ltd [ASX:BUB] is up 9.2%, trading at 95 cents.

It’s been a remarkable rise for the Bubs share price over the last month. After hitting a 52-week low of 40 cents on 13 March, it is now up a whopping 137.5% since then:

ASX BUB - Bubs Share Price

Source: tradingview.com

We look at what the future may hold for the Bubs share price, its latest quarterly, and the regulatory environment in China for infant formula companies.

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Bubs share price chart tells us a few things

Based on the chart above you can see the Bubs share price snapped a downtrend earlier this month.

About halfway from the downtrend drawn on the chart, you can see the completion of the Bellamy’s takeover by China Mengniu Dairy Company Limited.

Given, the breakout for the Bubs share price, it is also worth paying attention to the relative strength index (RSI) at the bottom.

Bubs shares are now firmly in the overbought range with a reading of 80.

It’s just one way to think about whether Bubs will continue its run, but a pullback could be in the offing if you put any stock in the RSI.

Now for the narrative around Bubs over the last year.

Investors appear to like the latest numbers

Here are the highlights from their most recent quarterly:

  • Record quarterly gross revenue of $19.7 million, a 67% lift on the same time last year and up 36% on last quarter
  • Positive operating cash flow of $2.3 million
  • Australia region up 34%
  • China region up 104%

The last bullet point strikes me as the most important here.

There were concerns that with Mengniu’s purchase of Bellamy’s Australia Ltd [ASX:BAL], Bubs could be squeezed out of the Chinese market with increased competition.

Not to mention the marketing expertise of Mengniu and the coveted State Administration for Market Regulation (SAMR) licence which BAL got this time last year.

A SAMR licence lets a company sell its products in retail outlets.

So piecing this all together, Bubs’ most recent quarterly numbers reflect the success of its Alibaba and Beingmate Joint Venture.

It makes sense too.

With the lockdown killing off retail opportunities in countries around the world, you would expect online channels to pick up the slack for infant formula companies in Australia.

The question is though, is this just a sugar hit?

Bubs has yet to receive its SAMR licence, and this may be holding it back for when the Chinese retail world restarts.

Mengui and Bellamy’s may continue to edge out Bubs if the environment returns to normal.

Obviously there would be a quick re-rate for the company should they get the SAMR, such is the nature of the beast.

But remember that it’s an opaque market — so don’t expect to get a clear timeline on when this may happen anytime soon.

Regards,

Lachlann Tierney,
For Money Morning

PS: In this free report, Money Morning analyst Lachlann Tierney reveals two assets set to benefit as the ‘corona crisis’ worsens. Click here to claim your copy today.

About Lachlann Tierney

Lachlann Tierney is an Analyst for Money Morning and has been investing for nearly a decade. With a Masters of Science from the London School of Economics, he brings a sound understanding of global markets to his writing. Lachlann is interested in emerging technologies, energy solutions and helping people invest…

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