There was a time last year when dairy was the hottest thing on the ASX — but they are a bit on the nose now amid increased competition, uncertainty about the total milk pool and tight regulation in China.

About halfway through last year, ASX stocks offering investors exposure to dairy, China exports and infant formula were averaging 170 per cent yearly returns; fast forward to now and the same group is down 20 per cent year-on-year.

Their collective share price fell 6 per cent in the space of a month thanks to a tough financial reporting season.

Of 18 companies with exposure to dairy — see below for a detailed table — only seven recorded a profit, and all but one of those are gigantic conglomerates.

Take Bellamy’s Australia (ASX:BAL) as an example. Long considered a bellwether for ASX dairy stocks, the company disappointed investors with an FY19 result that missed previous guidance and consensus estimates, as it continues to wait for approval to export its products to China.

“The extent of the FY19 miss was clearly disappointing,” Morgans analyst Belinda Moore wrote in a note.

“While the company was upbeat on its future and its upcoming pipeline of higher margin products, there is still plenty to prove following an underwhelming past 12 months. The key downside risk is if the new products fail to gain traction in what is an already overcrowded category.”

Morgans lowered its price target for Bellamy’s, as well as $10 billion giant A2 Milk (ASX:A2M) and Bega Cheese (ASX:BGA).

Moore said it “could get worse before it gets better” for companies in the sector.

“The outlook for FY20 remains tough. Falling milk supply and excess manufacturing capacity is continuing to cause fierce competition for milk and is seeing dairy manufacturers once again offer a farmgate milk price well in excess of what it should be under more normal circumstances.”

Paul Jensz, director of research at PAC Partners, agreed the outlook was tough.

“There is increased competition for milk here in Australia and an uncertainty about the total milk pool,” he told Stockhead.

“Extra capacity into the arena has driven the milk price up to record highs and for the formula exporters regulatory issues are slow.”

Exports of Australian infant formula to China require approval of the export production establishment from the General Administration of Customs of the People’s Republic of China (GACC).

Approval of the formulation and brand of the infant formula product is also required from the State Administration for Market Regulation (SAMR).

However, one can sell products into China via e-commerce channels without SAMR approval, although that approval would open the floodgates for a company as it would allow sale of products through offline channels as well.

But such approvals are very slow to come from Chinese authorities. Australian exporters have had a golden run for a while, with Chinese consumers favouring imported products after the melamine scandal in China in 2008 that killed hundreds of children.

But the quality domestically has improved dramatically, and Jensz said that was leading to more challenging market conditions for Australian companies.

“There is no easy ticket to approval, and Chinese tinners have been under incredible pressure in the last 10 years,” he said.

“They’ve spent a lot of capital in that time to get to where they are now and are saying if we’ve spent this money to adhere to the standards, then the inspectors should be coming to see us, not Australian companies.

“So it is tough all around, and this places more pressure on smaller players who now need to differentiate themselves to make money.”

Jensz said companies like Bellamy’s and Bubs Australia (ASX:BUB) are doing the best they can selling through ecommerce channels — Bubs has a partnership with Chinese distributor Beingmate and a relationship with Alibaba.

“Chinese consumers are going to look more favourably at a group with brands associated with Alibaba and Beingmate,” he said.

Here is a table of ASX dairy stocks and their FY19 financial performance. Click headings to sort

ASX code Company FY19 revenue % change on FY18 FY19 profit FY19 loss % change on FY18 Market cap
A2M A2 Milk $1.2b 41% $2.7b - 47% $10.1b
AHF Australian Dairy Nutritionals $21.4m 9% - $4m 3% $44.1m
AU8 AuMake International $44.3m 107% - $8m 28% $46.5m
BAL Bellamy's Australia $329m 19% $22.3m - 49% $926m
BFC Beston Global Food $85.2m 77% - $27.3m 109% $48.7m
BGA Bega Cheese $1.4b 13% $11.8b - 59% $855m
BUB Bubs Australia $43.9m 160% - $35.5m 45% $604m
BXN Bioxyne $2.3m 4% - $1.4m 4% $12.8m
CLV** Clover Corp** $34.3m 10% $4.5m - 40% $352m
FNP Freedom Foods $476m 35% $11.6m - 9% $1.5b
FSF** Fonterra $9.1b 1% $71m - 121% $319.6m
HRL HRL Holdings $30.8m 13% - $7.1m 374% $51.8m
JAT Jatenergy $66.4m 2768% - $20.5m 1515% $47.1m
KTD** Keytone Dairy** $2.5m 24% - $3.3m 1054% $82.8m
LON Longtable Group $25.6m 195% - $24.2m 262% $36.3m
SM1** Synlait Milk** $471m 7% $37.3m - 10% $1.6b
WHA Wattle Health $1.1m 31% - $9.9m 50% $75.9m