China-focused dairy exporters ride out COVID-19, but a nascent domestic industry threatens
Food & Agriculture
Food & Agriculture
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The majority of ASX stocks that export dairy products to China are down over the last 12 months, but the sector faring comparatively well during COVID-19.
Despite the Chinese economy contracting 6 per cent in the March quarter, when the virus first broke out, Rabobank estimates that liquid milk imports and dairy processing volumes only fell by just over 2 per cent year on year.
Analyst Sandy Chen believes the industry has turned around from the lows of earlier in the year.
“Production is in growth mode, but by how much remains a mystery,” Chen said.
Of the ASX’s 15 small caps with exposure to this sector only two are in the green on a 12 month basis. One is Maggie Beer (ASX:MBH) which has risen off the back of success in Australia.
The other is the industry’s largest stock – New Zealand headquartered A2 Milk (ASX:A2M). The company saw a 30 per cent spike in both revenues and profit.
One of A2’s lucrative markets was China, where it reporting sales had effectively doubled in the last year to $337.7 million.
Here’s a list of all ASX dairy stocks and their 1 year percentage performance:
Scroll or swipe to reveal table. Click headings to sort.
A potential threat to dairy exporters is China’s own domestic industry.
The Chinese government is currently planning and constructing a significant expansion of its milk production capacities.
Rabobank’s Chan estimates the total number of dairy projects currently being planned and constructed – based on recent news announcements – will facilitate an additional 700,000 head of dairy cows.
These will increase China’s national dairy herd by eight per cent over the coming years.
“Just looking at some of the projects, the sheer size of them mean they will take multiple periods to complete,” he said.
“So we’re not seeing an immediate flow of milk coming into the market on the next 6-12 months but these are in the pipeline.”
One small cap hedging its bets for this shift is Bubs. Earlier this week announced it would seek to move production in country.
CEO Kirsty Carr said this strategy would mitigate risks in the market and also provide it with a faster path to market.