A crackdown by Chinese authorities on international importers of dairy formula is just one reason behind a decline in the fortunes of Australian exporters, says an expert.

After a bumper 2018 where at one point China-focused ASX dairy formula stocks were averaging 170 per cent one year returns, momentum has ground to a halt.

Now, stocks in that same sub-sector have lost on average 3 per cent of their value; see the table below.

Paul Jensz, executive director of research at PAC Partners, says regulators in China have dimmed their enthusiasm for international importers.

“The main changes in the last six months have been that the market to get into China has gotten tougher because of the delays with SAMR approval,” he explains.

SAMR (State Administration of Market Regulation) is the accreditation companies need if they want to export their products to China.

Crackdown causing slowdown

Mr Jensz says the tightened examination on Australian companies was the result of increased pressure from domestic companies.

“The main reason I think there has been a lot of change in China is to do with the way domestic and international tinners have been audited and what they are required to do to get their products onto shelves,” he says.

“There has been massive upheaval to assure Chinese customers that they are getting the best product, whether that’s domestic or international.”

Skepticism of infant formula has been present in China for over a decade, thanks to products being contaminated with melamine in 2008, causing six deaths and more than 54,000 hospitalisations.

That led initially to a boon for international importers, whose products were seen as superior and more trustworthy, but Mr Jensz says domestic brands are now fighting back, adding to importers’ woes.

“Domestic tinners have been under a lot of financial pressure to change and make money,” he says. “With domestic upheaval companies now have to pass higher levels of quality assurance.

“So they are lobbying their government officials saying ‘if we’re having all this change we want breathing room, we don’t want a flood of imports’, which is fair and logical, just like we wouldn’t allow a lot of imports of iron ore or fruit and veg.”

An alternative route

However, there is an option — companies can get their products into China via the Free Trade Zone and by taking advantage of China’s e-commerce laws, which Mr Jensz says is a smart business move for those without SAMR approval.

“The groups that can sell via e-commerce or Free Trade Zone channels and have a strong presence here in Australia will do well,” he says.

“People who are vacationing here will see the products on the shelves at a pharmacy or Woolies or Coles, and then they are more likely to try and track down those products.

“So if a brand is doing well here in Australia, they are the ones customers will lobby to have imported.”

Of the companies bargaining to join the likes of Bellamy’s, Synlait Milk and A2 Milk as dairy formula midcaps, Mr Jensz says Bubs Australia (ASX:BUB) and Wattle Health (ASX:WHA) have established strong footholds.

“Bubs has a strong presence here on supermarket and pharmacy shelves and Wattle Health has been working for a long time on owning the supply chain,” he says.

Wattle Health recently announced its manufacturing partner, Blend and Pack, had renewed its Certification and Accreditation of the Peoples Republic of China (CNCA) accreditation, and earlier this month increased its stake in B&P to 51 per cent.

ASX codeCompanyToday's PricePrice Jan 21% change
HRLHRL HOLDINGS LTD0.0950.0879%
LONLONGTABLE GROUP LTD0.260.33-21%
BXNBIOXYNE LTD0.020.027-26%
BUBBUBS AUSTRALIA LTD0.50.4316%
BAL BELLAMY'S AUSTRALIA LTD8.77.5715%
BFC BESTON GLOBAL FOOD CO LTD0.130.14-7%
AHF AUSTRALIAN DAIRY NUTRITIONAL0.130.1254%
CLV CLOVER CORP LTD1.61.43511%
AU8 AUMAKE INTERNATIONAL LTD0.20.215-7%
SM1 SYNLAIT MILK LTD9.419.5-1%
WHA WATTLE HEALTH AUSTRALIA LTD0.921.035-11%
JAT JATENERGY LTD0.0630.087-28%
KTD KEYTONE DAIRY CORP LTD0.40.445-10%
A2M A2 MILK CO LTD12.6811.748%
LGO LONGREACH OIL LTDsuspsusp0%