A2 Milk shares gain on positive China infant formula audit

NZ authorities will audit the factory of A2’s contract infant formula manufacturer Synlait – a key step to continue selling its products in China.

A2 Milk chief David Bortolussi has been working to reset the company’s China strategy. Picture: Britta Campion

A2 Milk shares have jumped more than 6 per cent after the company edged closer to gaining approval from Chinese authorities to sell infant formula under the country’s new national standards.

Beijing has allowed New Zealand’s Ministry of Primary Industries to audit, on its behalf, the factory of A2’s contract manufacturer Synlait, with inspectors set to begin the process on Monday.

The approval is critical for A2. Without it, the company will no longer be able to sell its products in China.

The on-site verification audit is the last step in the re-registration process before requesting final approval by China’s State Administration for Market Regulation (SAMR).

“The company looks forward to providing a further update when its 1H23 results are released on Monday,” A2 said in a statement to the ASX.

A2 shares advanced 6.3 per cent to $7.10 on Friday, valuing the company at almost $5bn. This compared with a 0.9 per cent fall across the broader sharemarket.

“We’re pleased to have certainty around the audit process timing,” said Grant Watson, chief executive of Synlait, which is listed on the New Zealand Stock Exchange.

Unlike smaller rival Bubs, which last September said it would make infant formula in China for the Chinese market, A2 manufactures all its infant formula in New Zealand at Synlait.

A2’s fortunes are tied closely to China, despite the company finally gaining US Food and Drug Administration approval to sell infant formula in America.

China and other Asian countries account for more than half of A2’s annual revenue.

The company’s sales to China and elsewhere in Asia jumped 24.5 per cent to $726.5m in the year to June 30, while earnings before interest, tax, depreciation and amortisation almost doubled to $145.1m.

Such is the sensitivity to China that the collapse of the lucrative daigou, or reseller market, at the onset of Covid, sent A2 shares crashing from record highs of almost $20 to a low of $4.21, sparking three shareholder class actions across Australia and New Zealand.

The company has successfully halted the New Zealand lawsuit until the two Australian cases are heard and since been regaining ground steadily under chief executive David Bortolussi’s turnaround strategy.

In the past six months, A2 shares have soared 41.6 per cent as it works to shore up its Chinese business.

This has included signing a five-year exclusive distribution deal with China State Farm last October. The partnership renews an agreement originally struck in 2013, and aims to strengthen A2’s ties to China.

China State Farm is a subsidiary of China National Agriculture Development Group (CNADC), which also owns China Animal Husbandry Group.

A2 connections with the Chinese state-owned company extends beyond distribution.

In late 2020, it bought a 75 per cent stake in what was then a poorly-performing infant formula factory, New Zealand’s Mataura Valley, from China Animal Husbandry Group for $NZ268.5m ($244.4m).

The deal helped China Animal Husbandry Group meet the terms of a $NZ115m loan it had with China Construction Bank Corporation that dictated that it needed to sell down its holding in Mataura to at least 60 per cent.

CNADC chairman Cao Jianglin late last year described the company’s relationship with A2 Milk as “close and strong”.

“We look forward to this continuing,” Mr Cao said. “We are delighted to continue building our relationship with The A2 Milk Company and see great opportunity for our partnership in China”.