Bubs axes ‘made in China’ infant formula deal

The infant formula company planned to make products in China for the Chinese market, but has dumped the strategy amid a battle to seize control of the company.

Bubs’s new board led by Katrina Rathie has axed the company’s plan to produce infant formula in China for the Chinese market – a pet project of her predecessor Dennis Lin.

In a statement to the ASX on Friday, Ms Rathie said the joint venture which the previous management signed last September would no longer proceed after its Chinese partner has so far failed to get registration under Beijing’s new national standards.

Bubs had entered agreements with Zhitong Health Technology Co, Heilongjiang Anjia Dairy and Zhikang Health Technology Co. If successful, the deal would have allowed Bubs to sell what is known as “China label” infant formula products and access the country’s general trade – including mother & baby stores – which represent about 80 per cent of the overall market.

Bubs said the deal was conditional on Heilongjiang gaining State Administration for Market Regulation (SAMR) approval for a goat infant formula brand slot licence, which would have been for Bubs’s exclusive use.

Dennis Lin, former executive chairman of Bubs. Picture: Nikki Short

“To date, no approval has been given by SAMR,” the company said.

In the ASX statement it said the decision to axe the agreement also followed Bubs’s receiving the findings of an “independent expert to review the China JV”.

“As a consequence of the findings of the independent report and having not received the SAMR approval, Bubs Australia has now communicated to its JV partners that it no longer wants to proceed with the transactions previously contemplated by Bubs’ former executive management team. The Company has requested Anjia immediately withdraw the SAMR application made in relation to Bubs’ products,” Bubs said.

Bubs will now seek to have its factory in Melbourne registered under China’s new national standards so it can sell China label infant formula products.

“Bubs Australia will now revisit its own resubmission and registration application under SAMR in respect of three slots for which nomination rights are held by the Australian Deloraine facility, where it can leverage its clean and green credentials and its state-of-art manufacturing asset to produce a range of Bubs Chinese label infant formula products.”

It comes as Bubs’ China revenue has collapsed, with the company expecting to deliver full year sales “at the lower end” of its previous guidance of $13.5m to $13.8m. This compares with $53.6m in 2022.

The company blamed an exclusive China distribution deal that Mr Lin and former chief executive Kristy Carr signed with AZ Global, saying it has failed to move stock and “continues to disappoint”.

“As previously reported, there remains a significant amount of inventory held in trade, predominantly Bubs Supreme. This product was developed for AZ Global and (its subsidiary) Alice for exclusive distribution into China,” Bubs said in a statement to the ASX,

“Bubs Australia understands there is more than five years of Bubs Supreme finished goods inventory held in multiple warehouses, based on the current rate of sale.”

AZ Global and its subsidiaries also owes Bubs $5.65m, which the company said it was pursuing. AZ Global, which is a shareholder in Bubs, has joined the push led by Ms Carr and Mr Lin to spill the board.

“Despite repeated requests for payment, the debt remains outstanding,” Bubs said.

“In the period September 2022 to March 2023 Alice has taken delivery of volumes of Bubs Supreme products falling well short of its contractual commitments in respect of the same period under its sales and purchase agreement with IFC.

“As a consequence, Bubs now holds significant amounts of bulk raw material that was purchased to meet its supply obligations under the agreement with Alice.”

Acting chief executive Richard Paine said: “It is clear that the exclusive distribution agreement with AZ Global has not delivered for shareholders”.

“Bubs will take a more strategic approach to its distribution in China going forward. Our brand is well respected in this critical market, and we need to progress with a multi-channel strategy supported by professional and experienced trade partners on the ground who can deliver us real time, valuable market insights,” he said.

“Bubs has a great opportunity to grow our brand presence in China, alongside the US and other international markets. We look forward to providing a broader update on our strategic review shortly.”

Bubs shares closed flat on Friday, finishing the week down 7.7 per cent at 18c.