While it’s developed for the youngest and smallest, infant formula is actually big business, with Australia at the forefront. Here is a quick primer on everything you need to know about baby formula companies listed on the ASX.

Over the last few years the demand for infant formula, in particular Australian-made formula, has grown exponentially.

This can be most obviously seen in the ASX’s three biggest bellwether infant formula stocks: A2Milk (ASX:A2M), Bellamy’s (ASX:BAL) and Synlait Milk (ASX:SM1).

Bellamy’s is perhaps the most well-known.

It listed in August 2014 at $1.27; nearly four-and-a-half years later its share price sits at $7.20, and even peaked over $20 in March last year.

A2 Milk was next to list, in April 2015, followed by Synlait in November 2016.

The gigantic demand for their products has seen their share prices move 1,824 per cent and 178 per cent respectively.

Combined, the three companies have a market capitalisation of more than $10 billion.

But investors need to remember that not all dairy stocks play in the lucrative infant formula trade: it’s a highly regulated niche that some companies, such as Keytone Dairy (ASX:KTD), do not play in specifically for that reason.

Where it all came from

Infant formula dates all the way back to 1865, a time during which women who were not able to breastfeed often employed a wet nurse — another woman who could breastfeed — to ensure her children were well fed.

That was until German chemist Justus von Liebig developed, patented and marketed an infant food, first in a liquid form but then moving to a powdered form as it prolonged preservation.

His formula consisted of cow’s milk, wheat and malt flour and potassium bicarbonate.

(Modern formula is also made with cow’s milk but is supplemented with a stack of additives necessary for healthy growing babies, including protein, fat, Vitamins A, C, D, E and K, carbohydrates and nucleotides, amongst others.)

As preservation techniques, scientific knowledge, manufacturing practices grew steadily throughout the 20th century, so did the demand for and availability of the product.

By the 1970s, generic brands were being sold in addition to commercially marketed brands in American retailers.

Justus Von Liebig hard at work.

Demand drivers 

The growth of the middle class is often cited as reason for today’s booming market.

Gennadi Koutchin, a director at XEC Partners, says that growing urban populations in China and Asia are the reasons behind the long-lasting upward trend.

“More people are moving to the urban areas, working more and there is an increased reliance on some of these convenience products,” he says.

“Add to that the growth rate of the economy and the population quite simply has more money to spend. The growth has come from emerging countries and I think there is still room for it to grow further.”

“In addition, removal of China’s one-child policy and growth in the middle-class population are set to continue driving demand for quality dairy products.”

He also says that Australasia’s high product standards make Australia — and to a lesser extent New Zealand — world leaders.

“The product coming from Australia and from New Zealand is considered high quality and clean,” he says. “Lower tariffs resulting from free trade agreements further facilitate trade with China.

“Images of wide green pastures are often used to represent Australian products. Cleaner environment means cleaner feedstock and that is attractive.”

“Add to that, our proximity to the market makes a compelling supplement to domestic producers.”

A salesgirl introduces a bag of milk powder to customers China. Approximately 53,000 infants were hospitalized and at least three babies died after ingesting contaminated dairy products containing an industrial additive called melamine. Pic: China Photos

The impact of regulation

Changing international regulation also has an impact, particularly on the import and export of products.

As the industry began to boom from 2015 through 2017, strong demand necessitated lots of supply. And as with all burgeoning industries or disruptions, it took some time for regulation to catch up.

Paul Jensz, executive director of research at PAC Partners, says while that resulted in early opportunity with a see-what-sticks attitude, it began to cause confusion.

“We had a situation where it was in flux a lot of 2017, and the Chinese authorities, quite rightly, tried to bring down the number of brands and provide differentiation between the thousands of products,” he says.

“It was very confusing for the authorities and for customers. Since then they have brought in rules to better regulate it — both for products that are internally generated and also the imported products.”

From January 1 last year, the infant formula registration requirements in the new Food Safety Law came fully into force.

Infant formula products, either domestically manufactured or imported, must obtain formula registration before they can be sold in China. That includes registration from the China Food and Drug Administration (CFDA), now renamed as SAMR.

Though some may view increased regulation as anti-competitive, Jensz says it has increased opportunity for serious players who are on top of their game.

“That stability in the last 12 months has allowed Australian listed companies to plan ahead and seek partnerships and distribution in China,” he says.

Jensz says investors looking at China-focused infant formula exporters should focus on a company’s supply chain.

“The Chinese like groups who are in control of their entire supply chain — either in partnerships or owning it from the farm to the tin,” he says. “A2 and Bellamy’s are two good examples.

“So, companies who have that high-level of strategic planning and own their assets are well positioned.

“The second part is building up your inventory and getting distribution right so that you’ve got a manageable inventory and reasonable cash flow.

“So it’s a mix of the long-term planning and the short-term inventory and distribution, and the companies who’ve been able to do both have done well.”

Lucrative market

The infant formula market surpassed $70 billion in 2017, according to industry researcher Research and Markets.

And with the above driving factors set to continue, that figure is forecast to hit $98 billion by 2023, for a compound annual growth rate of 5.5 per cent over the coming years.

A 2017 Deloitte report also found that trust in domestic Chinese infant formula brands remains low since 2008, when six infants died and 54,000 were hospitalised due to the contamination of formula with melamine.

That has led to the growth of the daigou, a word translating to ‘buying on behalf of’. It describes people who purchase Australian dairy products and send it back to China.

A Nielsen report pointed out there are up to 200,000 daigous operating in Australia, with some estimates of sales of up to $100 billion annually across the wider retail sector.

ASX listed infant formula and dairy stocks

There are around 16 ASX-listed stocks dabbling in infant formula, including the three big boys, or what we’ve affectionately labelled the baby bottle crew.

Below we profile some of the brightest names in the sector.

Swipe or scroll to reveal full table. Click headings to sort

ASX codeCompanyMarket cap
A2MA2 Milk$8.6b
AHFAustralian Dairy Nutritionals$33.4m
AU8AuMake International$61.1m
BALBellamy's$854.7m
BFCBeston Global$62.1m
BUBBubs Australia$194.2m
BXNBioxyne$17.3m
CLVClover Corp$229.6m
HRLHRL Holdings$43.9m
JATJatenergy$71.6m
KTDKeytone Dairy$66m
LGOLongreach Oil$8.5m
LONLongtable Group$40.5m
SM1Synlait$1.7b
WHAWattle Health$199.4m

Australian Dairy Nutritionals (ASX:AHF)

Until recently known as Australian Dairy Farms, Australian Dairy Nutritionals got the go ahead to change its name from shareholders at its annual general meeting.

It is a vertically integrated Australian dairy group which owns high-quality dairy farms and a processing facility in South Western Victoria, the so-called ‘golden triangle’ of Australia’s dairy industry.

It produces premium quality, branded dairy products using milk sourced fresh from its farms.

It recently completed the purchase of Flahey’s Nutritionals, which it sees as a “key step in entering the dairy nutritionals and infant / toddler formula market”.

AuMake International (ASX:AU8)

AuMake is one of the baby bottle crew focusing on the daigou market, as outlined above.

It describes itself as a retail company, connecting Australian suppliers with not only daigou but also the significant Chinese tourist market.

Aside from infant and baby formula, it also offers healthcare and food supplements, skin, body care and cosmetics and wool and leather products.

It hires bilingual staff and also utilises three of the biggest Chinese payment platforms in WeChat, Alipay and UnionPay as well as providing logistics assistance for those sending to China.

Back in November, AuMake said China’s stringent new ecommerce laws would strengthen its business.

Bubs Australia (ASX:BUB)

It should come as no surprise that a company going by the name of Bubs dabbles in infant formula.

Bubs Australia is the country’s only vertically integrated producer of goat milk infant formula.

It hopes to inspire “new generations of happy, healthy bubs through its range of Australian made premium infant nutrition products”, which are specifically made to make the most of their first 1,000 days of living.

It also makes fresh goat milk, yoghurt and Jersey milks which are sold in supermarkets and chemists here and exported to China, Southeast Asia and the Middle East.

Back in June the company signed a $17 million sales deal with online Chinese distributor New Times Asia.

Bioxyne (ASX:BXN) 

Bioxyne describes itself as a health and wellness company, focusing on “clinically effective health and wellness products particularly in the gut and immune health areas”.

Its shares rocketed in December 2017 when it announced that it was moving into infant formula.

The products behind the fuss were dairy-based drinks under the BK18 brand with immune-boosting probiotics, for infants as well as the rest of the family.

Clover Corp (ASX:CLV)

Infant formula has been a boon for Clover Corp, which makes oils and powders that can be added to foods, including milk powder.

It more than doubled its profit for the 2018 financial year thanks to China’s enthusiasm for infant formula, going from $3.6 million to $7.6m.

And in November it sought to become one of the biggest players in the field with by taking a 35 per cent stake in New Zealand company Melody Dairies — giving it access to a multi-million dollar spray industrial spray dryer that can convert large volumes of liquid into dried forms for ease of use, transport and storage.

Jatenergy (ASX:JAT)

Jatenergy exports infant formula to China, including brands such as Golden Koala.

It was one of the best performing ASX stocks small caps in early 2018, winning ten-bagger status after it joined the infant formula export crew which propelled its shares from 2c to as high as 29c.

The company is working on developing an in-house product range including infant formula brands, as well as increasing online sales through JD Global and establishing a retail presence in China for both speciality shops and maternity wear.

Wattle Health (ASX:WHA)

Shares in Wattle Health jumped 22 per cent back in June last year when it signed a $34 million Chinese infant formula deal.

The company produces nutritional milk formulas for babies and toddlers.

In April 2018, Wattle signed a deal with China’s International Supplies and Distribution Company to sell its products into mainland China.

Earlier last year it also announced a $78 million joint venture Organic Dairy Farmers of Australia (ODFA) and Niche Dairy to design, construct and operate an organic spray drying facility in Australia.

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