China’s online sale move boosts shares in Blackmores, A2 Milk

Companies with a strong focus on China have enjoyed a share price boost after Beijing clarified rules for online sales channels.

Blackmores chief Richard Henfrey talks to Trade Minister Simon Birmingham at the China International Import Expo in Shanghai earlier this month. Picture: DFAT

Australian companies with a strong focus on China, including vitamin maker Blackmores and dairy producer A2 Milk, have enjoyed a share price boost after the economic powerhouse clarified rules for online sales channels.

China premier Li Keqiang announced that a grace period that had previously been given to a list of foreign consumer products sold through the cross-border e-commerce (CBEC) channel would be replaced in January.

The news was a positive for Blackmores, A2 Milk, Treasury Wine Estates and Bellamy’s because the regulatory risk had recently increased as Beijing had made no announcement about extending the grace period beyond December 2018 for the trade of certain products.

Shares in Blackmores closed almost 6 per cent higher at $133.40 yesterday, while shares in A2 Milk improved 5.88 per cent to $9.90. Bellamy’s climbed 4.85 per cent to $7.56 and Treasury Wine lifted 5.7 per cent to $14.29.

Under the new China policy, cosmetics, health food and infant formula sold via CBEC would not require compliance with domestic regulations.

The new rules also allow for an increase in the quantum of individual purchases made through CBEC that attract a lower tax rate for Chinese consumers.

“The rule changes are a meaningful positive for Blackmores, allowing all its products to continue to trade through CBEC without requiring the difficult ‘blue hat’ registration for offline sales of vitamins in China,” JP Morgan analysts said. “It provides a level of certainty in the regulatory outlook and will likely allow for logistic providers and distributors to be confident in reinvesting back into the channel.”

How China focused stocks rose

For Treasury Wine, China is growing as a source of sales and earnings, with drinkers in the region buying up increasing shipments of the winemaker’s key brands, especially red wine and its premium label Penfolds.

In fiscal 2018 Treasury Wine reaped $547 million in sales from Asia, led by sales to China, which made up one-fifth of its group sales. Almost 50 per cent of its pre-tax earnings are from Asia.

A2 Milk sells its flagship Platinum infant formula products into China via the daigou network — where the products are purchased at consumer stores in Australia and transported to China — and through cross-border e-commerce platforms.

A2 also distributes its product through 12,000 Mother and Baby stores. It has added 2000 stores to that network in the past four months.

The company said this week its China label infant formula sales had grown by more than 75 per cent in the first four months of the financial year compared to the previous 12 months and flagged a significant ramp up in marketing spending.

A2 managing director Jayne Hrdlicka said in a note to the market that it would “continue to proactively monitor and work closely with its partners to respond to China’s evolving regulatory requirements”.

Blackmores chief Richard Henfrey recently said that signs from China had been pointing to a gradual alignment of regulations between retail business and the cross border e-commerce.

“The Chinese government’s commitment to promoting international importers is testament to the way they see this developing,” he said.

Macquarie released a note to clients yesterday saying it had initiated coverage of Blackmores’ with a $150 price target and an “outperform” rating, backed by the China story.

“Blackmores has been successful in leveraging a strong domestic market position to capitalise on China’s insatiable appetite for higher-quality health food products,” the analysts said. “We expect the emergence of China’s middle class, demographic trends, rising health awareness and supplement usage to underpin consumption growth.”

Additional reporting: Eli Greenblat, Damon Kitney