Infant formula stocks have doubled in value as China authorities chill out
ASX-listed infant formula stocks have on average doubled in value over the past year — and greater regulatory stability in China is a major reason.
That’s according to Paul Jensz, executive director of research at PAC Partners.
A Stockhead review of 16 China-focused baby formula stocks has found that, on average, share prices have grown 102 per cent since this time last year. (See table below).
Thirteen of the stocks are up year-on-year — making it one of the ASX’s most consistent hot spots when compared to the likes of lithium, cannabis and blockchain.
>> Scroll down for a list of ASX infant formula stocks
And the baby formula sector is likley to continue on an upward trajectory thanks to greater regulatory certainty, says Mr Jensz.
“We had a situation where it was in flux a lot of last year, and the Chinese authorities, quite rightly, tried to bring down the number of brands and provide differentiation between the thousands of products,” he said.
“It was very confusing for the authorities and for customers.
“Since then they have brought in rules to better regulate it — both for products that are internally generated and also the imported products.
“That stability in the last 12 months has allowed Australian listed companies to plan ahead and seek partnerships and distribution in China.”
That stability has clearly benefited the sector’s large cap bellwether stocks Bellamy’s (ASX:BAL) and A2 Milk (ASX:A2M) based on their recent results and 12-month share price gains.
Small cap formula stocks have also benefited in share price growth if not yet in sales.
Despite falling a long way from its one-year high of 29c — and ahead of an earnings impact from recent infant formula moves — Jatenergy (ASX:JAT) is still one of the theme’s best performers measured by share price value with a 379 per cent year-on-year gain to 6.7c.
JAT last week reported a fall in revenue and a wider loss but said it expected revenue benefits in the current year.
The oil explorer-turned China exporter is pouring resources into developing its in-house infant formula brands as well as online sales into China and presence in bricks-and-mortar stores across the region.
AuMake (ASX:AU8), which last month announced it would make its own brand of infant formula, reported a big uptick in revenue to $21.4 million last week, though its full-year loss ballooned to $11.2 million.
The stock is down from a high of 83.8c in December but is still well ahead of its 8c issue price before listing in October.
The shares are ahead 254 per cent year-on-year, closing at 27c on Friday.
Clover Corp (ASX:CLV) — which also credits “increased Chinese demand and stability of regulations” for increased infant formula sales — is up 250 per cent in the past 12 months.
The stock has been as high as $1.81 in June before settling back down to yesterday’s intraday high of $1.59.
Keytone Dairy (ASX:KTD) joined the fray last month, and is already up 130 per cent on its listing price to 47c on Friday.
Look for strong leadership
Investors looking at China-focused infant formula exporters should focus on a company’s supply chain, says PAC Partners analyst Mr Jensz.
“There’s two parts to it; one, getting the supply chain right and two, build up inventory and get distribution right,” he says.
“The Chinese like groups who are in control of their entire supply chain — either in partnerships or owning it from the farm to the tin. A2 and Bellamy’s are two good examples.
“So companies who have that high-level of strategic planning and own their assets are well positioned.
“The second part is building up your inventory and getting distribution right so that you’ve got a manageable inventory and reasonable cash flow.
“So it’s a mix of the long-term planning and the short-term inventory and distribution, and the companies who’ve been able to do both have done well.”
The only infant formula-related stocks down over the past 12 months are Beston Global (ASX:BFC), down 15 per cent to 19.5c, and Longtable Group (ASX:LON), down 49 per cent to 48.5c. Longreach Oil (ASX:LGO) has been suspended since May 2017.
Here’s a table of the China focused dairy stocks listed on the ASX, with their 12-month share price performance:
Swipe or scroll to reveal the full table. Click on headings to sort