Bubs calls in lawyers over ‘failed’ China deal and $5.7m debt

A fight has begun in the Hong Kong courts between Bubs and its China distributor, as the infant formula brand moves to fend off a board spill later this month.

Bubs has launched legal action in Hong Kong to pursue a $5.7m debt from its China distributors Alice Trading and Willis Trading.

The two companies are subsidiaries of Hong Kong-listed Alpha Professional Holdings, which is also a shareholder in Bubs after it struck an equity/sales partnership in March last year.

But the partnership has failed to deliver on its promise, with Alpha and its subsidiaries failing to sell stock, with about five years’ worth of Bubs Supreme infant formula held in inventory.

In a statement to the ASX on Wednesday, Bubs directors, led by chair Katrina Rathie, said it had terminated its agreement with Alice and Willis with “immediate effect”, saying they had failed to meet their contractual obligations.

“Legal proceedings to collect the debts and other outstanding amounts due from Alice and requisitioner Willis Trading Pty Limited will now be commenced to protect shareholders’ interests,” Bubs directors said.

Despite the partnership failing to sell the quantities of stock promised, Alpha still had about 9.5 million of Bubs shares transferred to it last month. Alpha is also seeking $20m in refunds and credits from Bubs and is using its shareholding in the company to support a board spill led by founder and sacked chief executive Kristy Carr, and former executive chairman Dennis Lin.

Ms Carr and Mr Lin’s preferred replacement for Bubs chief executive Peter Nathan criticised Bubs’s current board for “picking a fight” with its Chinese distributor.

Mr Nathan – A2 Milk’s former Asia Pacific boss – said it appeared Bubs was walking away from the daigou or reseller channel when it had no interim plan to fill that void. Bubs can’t sell into China’s general retail, which represents about 80 per cent of the country’s infant formula market, given it does not have SAMR approval from Beijing.

“The way to grow this business again is to make sure the most capable player in this space is re-engaged – which I know I could do – and therefore you can start to gain some momentum in that channel based on the fact that you have got tourists returning in big numbers, students returning in very significant numbers,” Mr Nathan said.

Under Ms Carr and Mr Lin, Bubs hoped to gain access to China’s general retail market by piggybacking on a Chinese manufacturer’s SAMR registration. This would have meant manufacturing infant formula in China for the Chinese market – a plan the new Bubs board has since overturned.

Instead, Bubs will seek to get its factory in Melbourne registered under SAMR, a task few companies outside China or not under direct Chinese ownership have achieved, but would ensure greater control over its manufacturing processes and clean and green Australian image.

Jonathan Snape – an analyst at Bell Potter, which led a capital raising with Citi for Bubs last year – has a speculative, hold rating on the company’s stock.

“New management look to have made solid moves on OPEX reductions and reducing the monthly cash burn. However, with an anticipated 12 months available cashflow funding it is a race to EBITDA and cashflow break-even, which involves a combination of stabilising China, growing in the US and banking OPEX reductions,” Mr Snape said in a note to investors.

“Our hold, speculative risk rating is unchanged. The progress in the US remains encouraging and insulating against weaker results in China. Recent results from Alpha Group would imply that China is more likely a 2H24e than a 1H24e story, with inventory needing to be managed into that market.

“The clear challenge for Bubs is managing excessive inventory positions of the Bubs’s Supreme product held by channel partners in China without inflecting broader contagion to other Bubs’s products.”