A2 Milk rebounds to China’s top brands
A2 Milk looks set to defy the effects of a sluggish Chinese economy and a declining birth rate there with a lift in its net profit at its full year results announcement today.
The infant formula marketer took a big hit when Covid-19 almost destroyed the unofficial “daigou” trade in 2020.
It has also battled a declining birth rate in China — easily the world’s biggest formula market — and an economy that has been slow to recover from the Covid-19 pandemic.
China — a2’s main market — has seen its birth rate halve over the last 10 years.
Despite the headwinds, a2 Milk has rebounded to be one of the top five brands in China.
Market expectations are for the company to report a net profit of about $172 million for the June year from $155.6m a year earlier.
A post-pandemic boom in marriages in China is showing signs of running out of steam, but Craig’s Investment Partners said it still expects a2 Milk to come up with a strong annual result.
In the March 2024 quarter there were 1.97 million marriages in China, down 8.2% on the March 2023 quarter.
“Given the high correlation between marriages and births in the following year, this suggests that the baby bounce we expect in 2024 [following a spike in Covid-delayed marriages in 2023] is more likely to be an aberration rather than the start of a new upward trend,” Craigs said in a research note.
Craigs expects a2’s net profit to be above consensus forecasts at $183m.
In the background is cash-strapped Synlait Milk — a2 Milk’s sole provider of infant formula, in which it has a stake of just under 20% and which is making plans for a capital raise.
Oyvinn Rimer, senior research analyst at Harbour Asset Management, said “directionally” a2 Milk had done a good job of rebuilding after the Covid-driven earnings rout, and managing the demise of daigou and falling birth rates.
There has been a tough reregulation process to get through in China, so a lot of the smaller brands have fallen away, which has worked in a2 Milk’s favour, he said.
“A2 seems to have not only taken market share but also has grown volumes well above what the overall market would indicate,” Rimer told the Herald.