The takeover bid for Bellamys (ASX:BAL) gave hope to infant formula stocks that they could still stand out in China.

Companies had been worried that China was seeking to increase domestic infant formula as a share of the market. This did not stop the Bellamys deal, which showed that premium products are particularly attractive to consumers and local firms are open to tie-ups.

But in the first full month since the Bellamy’s bid only four stocks have gained and Bellamy’s isn’t one of them. In fact, the top stocks are diversified beyond infant formula or at least have markets beyond China.

The best of these is AUMake (ASX:AU8) which is a daigou store operator selling infant formula among other items. It has had a strong 2019 which has continued into the last quarter with $18.5m in revenues. But it is only up 11 per cent this month.

Second is HRL Holdings (ASX:HRL) which owns several businesses including Analytica Laboratories, which tests milk and dairy products for undesirable residues.

Third is New Zealand-based and dual listed Synlait (ASX:SYT), which does sell milk into China, with its most recent four-year licence being issued in January. But according to an investor day presentation – 56 per cent of its revenue came from Australia and New Zealand.

Making a modest gain was Clover Corporation (ASX:CLV), which in September reported a record $10.1m profit. While it anticipates growth in China, it is one of several markets for the company.

Here’s the list of ASX small cap stocks with dairy operations that have exposure to China, click headings to sort:

Code Name Price (4pm 5 Nov) Market Cap 1Y % Return 1M % Return
AU8 AUMAKE INTERNATIONAL LTD 0.13 $43.2M -54 11
HRL HRL HOLDINGS LTD 0.11 $54.3M -37 10
SM1 SYNLAIT MILK LTD 8.68 $1.6B 10 4
CLV CLOVER CORP LTD 3.14 $507.3M 115 1
WHA WATTLE HEALTH AUSTRALIA LTD 0.53 $103.1M -48 0
BAL BELLAMY'S AUSTRALIA LTD 12.98 $1.5B 67 0
A2M A2 MILK CO LTD 11.89 $8.9B 27 -1
KTD KEYTONE DAIRY CORP LTD 0.44 $99.0M 0 -6
AHF AUSTRALIAN DAIRY NUTRITIONAL 0.11 $42.3M -15 -8
BUB BUBS AUSTRALIA LTD 1.09 $575.8M 116 -11
LON LONGTABLE GROUP LTD 0.16 $31.1M -55 -11
JAT JATENERGY LTD 0.05 $41.3M -20 -13
BXN BIOXYNE LTD 0.02 $11.5M -46 -14
BFC BESTON GLOBAL FOOD CO LTD 0.09 $43.4M -45 -20

 

Headwinds in the industry

Daigou is still relatively new in Australia. Companies taking advantage of it such as AuMake (ASX:AU8) and Mediland Pharm (ASX:MPH) only started to gain favour with investors in the last couple of years. AuMake listed in October 2017 while Mediland lit up the boards in February this year.

But in the Chinese infant formula sector, the industry is moving towards a more direct distribution model. Equity research firm Wilsons believes companies will need to market in country both online and in store.

“We assess cost of doing business in China is increasing for fast-moving consumer goods broadly, driven by omni-channel and cost of data,” analysts Anna Guan and James Ferrier said in a report on Bubs Australia (ASX:BUB).

“Brands that previously relied on daigous will see a further step up in the near-term during the transition from daigou model to a more direct distribution model.

“More local expertise is also required as the brands are effectively competing directly in-country with its competitors.”

Despite concerns earlier this year that China was increasing regulation in hope that its own infant formula makers would grow; the analysts said they believed the overall regulatory environment had stabilised.

Goat infant formula?

Bubs is one of two stocks which has more than doubled in 2019, with Clover being the other, but Wilsons has put a ‘hold’ rating on the company.

This was despite noting sub-categories could be an opportunity, and Bubs’ niche goat infant formula product was one of them.

Imported products currently dominate due to supply constraints on goats’ milk in China. Only a year ago China’s largest infant formula maker Feihe invested in North America’s first and only goat infant formula plant.

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Asia’s appetite for Aussie infant formula players is on the rise