A2 Milk gets China tick of approval

03 Oct, 2017 12:00 PM
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Geoff Babidge: Our flexible multi-channel infant formula strategy in both China label products and cross-border English label products has positioned the a2 Milk Company well.
Shares in the company surged on the news, hitting an all-time intra-day high of $6.40 on Thursday.
Geoff Babidge: Our flexible multi-channel infant formula strategy in both China label products and cross-border English label products has positioned the a2 Milk Company well.

Infant formula company a2 Milk has been given the go ahead to keep selling its products in China, the first Australian brand to be registered after Beijing announced a crackdown last year.

Under the new rules, all companies wishing to manufacture infant formula in China, and all international companies wanting to export their milk formula to be sold in China, have to qualify for registration by January 2018. Before the changes were announced last year, about 2000 companies were marketing infant formula in China.

Shares in the company surged on the news, hitting an all-time intra-day high of $6.40 on Thursday.

A2's three infant formulas approved for sale in China under the new regime are among about 300 infant formulas that have received registration for sale in China from January.

The overwhelming majority of these are made by Chinese companies, with just over 50 of them international brands.

Infant formula companies in China and around the world are seeking a share of the huge Chinese market, which is worth billions of dollars in a country where millions of babies are born each year.

Other Australian-listed companies, including Tasmanian-based organic formula company Bellamy's, are also seeking approval to sell infant formula in China under the new regime.

A Bellamy's spokesman said the company would apply for a licence by the end of the year and was hoping to receive approval about six to seven months later.

In a report released after the announcement, UBS analysts said that while the registration was expected for a2's infant formula, it came about two months earlier than expected.

UBS analysts said they had not changed their earnings forecasts for the company because of the successful registration.

"A2 Milk's infant formula momentum has been exceptional, with inventories low and out-of-stocks prevalent in the Australian supermarket channel. In fiscal 2017, China direct sales were up $NZ51 million ($47 million) and estimated grey market sales up about $NZ128 million."

The company and its New Zealand-based manufacturing partner Synlait had to go through a "rigorous process" including testing of raw materials and finished products, certification of manufacturing standards and other measures to gain registration.

"Our flexible multi-channel infant formula strategy in both China label products and cross-border English label products has positioned the a2 Milk Company well in the context of the current regulatory requirements," A2's managing director Geoffrey Babidge said.

Synlait's managing director, John Penno, said the registration was "another milestone" in Synlait's partnership with a2.

"Having successfully navigated the process, in conjunction with the a2 Milk Company, we are now in a stronger position for future applications of other Synlait customers," he said.

In its recent annual results a2 Milk reported a $NZ90.6 million net profit (up 198 per cent), from total revenue of $NZ549.5 million.

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