A2 remains confident in Chinese demand as competitors emerge, share price drops

Tuesday 3rd April 2018

A2 Milk Co says it hasn't seen any change in growth in China and it's confident in its business as its share price continues to drop on news that competitors have begun selling their own A2-branded infant formulas in China.

The stock dropped 6.5 percent last Wednesday, when Nestle confirmed it had launched an A2 product under its Illuma brand, with the product called Atwo and sold in China. It fell a further 4.2 percent on Thursday and was recently down 4.4 percent to $11.86.

In a statement to the NZX and ASX this morning, A2 said it noted the recent media commentary but "is confident that the past investment in its brand has established a strong consumer franchise which will continue to strengthen as its level of investment and distribution continues to grow." A2 "continues to perform strongly in each of its key markets and in particular has not seen any change in the growth of its China business", it said.

A2's strong sales in China have seen the share price quadruple over the past year, from $3.04 this time a year ago to a record $14.10 on March 22, making it by far the best performer on the benchmark NZX50 Index in 2017. In February, the shares spiked 16 percent to a then-record after A2 announced it had more than doubled first-half profit on strong infant formula sales and had aligned itself with Fonterra Cooperative Group, a deal which will see the two companies partner up on a range of products, including possible a2-branded butter and cheese.

"The a2 Milk Company is the only company engaged in the sourcing, processing and marketing of solely A1 protein free dairy and nutritional products in global markets," the company said today. "This core principle contrasts significantly with likely new entrants who will need to consider how to communicate internally and externally the benefits of a new A1 protein free variant whilst their traditional range of products continues to include A1."

"The infant formula market in China is vast with an estimated retail value in the order of USD $20 billion and volume exceeding one million metric tonnes. There is a multitude of brands and recent experience of other businesses has demonstrated how challenging it is to establish new products in the absence of a strong and unique consumer proposition."

In the first-half results commentary, managing director Geoffrey Babidge said he expects continued revenue growth in nutritional products in Australia, New Zealand and China in the second half, along with further growth in fresh milk in the United States. He said gross margin will be broadly consistent with the first half's 49.8 percent, and earnings growth in the second half will be in the range of $35 million to $40 million.

(BusinessDesk)

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