A2 Milk shares lift on China reassurance

A2 Milk has reassured investors of growing Chinese demand, sending shares more than 8pc higher.

FOR HWT Business Magazine. A2 Milk feature at the dairy farm of Michael and Paula Gray from Rollands Plains NSW. Pic Nathan Edwards

Shares in the A2 Milk Company have risen more than 8 per cent after the it moved to reassure investors about its burgeoning China business, following recent downbeat commentary from its key rivals.

In a market update to the ASX following a presentation at a UBS conference this morning, A2 said its first-quarter revenue was in line with expectations at $NZ112.5 million, up 40 per cent on a year ago.

Importantly it said Chinese demand was growing as consumers became more aware of its flagship A2 Platinum infant formula and A2 Milk brands and that it was progressing towards registering its infant formula product in China.

A2 shares closed 8.8 per cent stronger at $2.04, against a flat benchmark index.

Two weeks ago broker Citi put sell recommendations on A2 and its rival Bellamy’s Australia after claiming both could be facing a sales “hole’’ in China over the next year, due to higher than expected inventory levels, competition and regulatory risks covering the sale of formula and milk powders. Shares of both companies were subsequently hit.

Listed dairy company Bega Cheese had also suffered a double-digit decline in its share price after revealing its infant formula milk powder joint venture with vitamins maker Blackmores was struggling to achieve predicted sales in China and its inventory had been written down by $7m.

“There has been some recent commentary from other companies that might have impacted peoples’ view about how we are travelling versus others. I’d like to think Shareholders have been encouraged by the fact we are on plan,’’ A2 chief executive Geoff Babidge told The Australian this afternoon.

The company also revealed it had engaged a China-based consultancy to help it better understand the Chinese market and A2 Milk’s competitors, to refine its pricing and strategy and to understand the impact of regulatory changes that were announced earlier this year.

In June the China Food and Drug Administration (CFDA) announced details of new regulations aimed at reducing the number of infant formula brands sold across the country.

The rules limit registered factories in China and offshore to producing three brands and nine different products each, which will impact Australian infant formula producers such as Bellamy’s A2, Bega Cheese and Blackmores.

The rules apply only to goods sold in China, not through the larger cross-border e-commerce channel, and companies are required to comply by the start of 2018.

“There is nothing additional of concern that has been flagged to us through that process that is concerning us in terms of changes,’’ Mr Babidge said.