China still wants infant formula from the Kiwis but it's no easy business

The updates from dairy stocks Keytone Dairy (ASX:KTD) and Synlait (ASX:SM1) shows China-bound infant formula is a difficult and thankless trade to be in right now.

With Australian exporters to China facing difficulties due to trade tensions you’d be forgiven for thinking New Zealand infant formula players were a safe bet in an otherwise appealing industry.

Infant formula in China: Appealing in theory, tough in practice

Infant formula demand generally has grown in conjunction with China’s population and foreign brands have been preferred since a mid-2000s contamination scandal which saw 54,000 kids hospitalised.

The poster company for this demand was A2 Milk (ASX:A2M) which grew from 50 cents to almost $20 in little over five years.

But now it is little over a quarter of its highs last year after drops in both revenue and earnings as well as the company’s forward estimates.

In A2 Milk’s case it was inventory issues as well as difficulties in the daigou trade.

Today, investors saw another New Zealand dairy and infant formula company focused on China downgrade its guidance.

This time it was Canterbury headquartered Synlait (ASX:SM1) which manufactures ingredient and nutritional milk powders, including infant formula.

Synlait is expecting a net after tax loss between $20 million and $30 million.

The company blamed shipping delays, lower prices for ingredient products and a more conservative approach to year-end inventory volumes and valuation.

CEO John Penno admitted he was disappointed to share this news but his company was focused on improving its financial performance.

The company has also been under siege in New Zealand’s media after a white supremacist blogger was found to be a Synlait employee.

While the company has disassociated itself from their views it has not yet responded to a petition calling for his dismissal.

Its shares fell by as much as 10 per cent in early trade. Similar to A2 Milk, which is both a client and shareholder of Synlait, it is well down from its mid-2020 peaks.

Synlait (ASX:SM1) share price chart

Keytone had better news

One company focused on the China infant formula trade which had better news is Keytone Dairy (ASX:KTD). While its shares saw a slight rally this morning it too has seen a share price drop in 2021.

The company told shareholders it had sold three times as much produce to Walmart China in the five months to May 2021 than it did in the same period last year.

This equated to NZ$3.3 million – well up from the NZ$1.2 million it sold in the same period last year – and received a further purchase order of NZ$1.4 million.

Keytone’s CEO Danny Rotman said his company was continually seeking new opportunities with new and potential clients.