A2 profit surges on China demand for infant formula

A2 Milk recorded buoyant sales in China during ‘Singles day’.Unlike some key local competitors, A2 Milk has boasted of “strong growth in demand” for its infant milk formula in China as it posted a 290 per cent surge in interim earnings. Its result also benefited from buoyant demand for its milk products as it pushes into new markets in the US and UK.

Net profit surged to $NZ39.38 million ($36.8 million) in the December half, from $NZ10.1 million a year earlier, the dairy products maker said in a statement to the ASX today.

The company pointed to rising sales in China in the December quarter, indicating strong sales during so-called ‘singles day’ when online Chinese retailer Alibaba fosters a popular sales event.

“Whilst the growth in demand was evident across the half-year, there was a marked increase in infant formula sales in the second quarter corresponding with the phasing of key sales events in China and an increase in market share in both Australia and China,” A2 Milk’s managing director Geoffrey Babidge said.

“This was achieved whilst maintaining a prudent approach to the management of production and inventory in recognition of foreshadowed changes in regulations for infant formula sold in China.”

Revenues for A2’s infant formula product increased by 62 per cent and 348 per cent in Australia and China, respectively, and with the operating EBITDA doubling and soaring by 1021 per cent, respectively. Investors though were not impressed chipping 2.5 per cent off the company’s share price which closed at $2.36.

The rate of growth in part reflects inventory shortages experienced during the year-earlier period, it said.

Total sales from infant milk formula in the half reached $NZ184.5 million, compared with full-year sales of $NZ214.4 million in the year to June 2016.

Discussing the results, Mr Babidge re-iterated the close monitoring of sales channels in China to ensure inventory levels are held in check.

“We have been conservative in our approach to infant milk formula inventory.”

A concern in the future is the evolving regulatory climate in China, which could hurt the flow of product from China, Mr Babidge said.

“We are growing the business (in China) but in a very measured way and not just monitoring our business, but also the supply chain. We continue to develop the daigou channel. What we are doing is working.”

Daigou – pronounced dye-goo – are shopping agents who buy things for residents on mainland China that are unavailable or hard to find there – often students who are studying overseas, or people who have migrated from China to another country who want to help friends and family, or earn extra money.

A2 Milk chief executive Peter Nathan said there was a view in some parts of the market that “all you needed was to have a product” to win sales in China.

“We are by far the exception, not the norm. You need a significant investment in the business to succeed. We always knew it was a challenging market; only a few succeed,” he said.

The company said it has also had some success in expanding its footprint in the US, where its product is now carried in around 1800 outlets, mostly in the south west. It’s also won access to an estimated 1100 outlets in the south east of the US.

Analysts with Citi warned that risks continue to be skewed to the downside for A2 Milk, due to the risky transition period in China ahead of the new regulatory regime from 2018, rising dairy costs and potential adverse effects from Bellamy’s woes.