While it’s developed for the youngest and smallest, infant formula is actually big business, with Australia at the forefront. Here is a quick primer on everything you need to know about baby formula companies listed on the ASX.

Over the last few years the demand for infant formula, in particular Australian-made formula, has grown exponentially.

This can be most obviously seen in the ASX’s three biggest bellwether infant formula stocks: A2Milk (ASX:A2M), Bellamy’s and Synlait Milk (ASX:SM1).

Bellamy’s is perhaps the most well-known and is now gone, proving how in demand these companies are.

It listed in August 2014 at $1.27; nearly four-and-a-half years later its share price sits at $7.20, and even peaked over $20 in March 2018.

In September 2019, it caught the eye of Chinese dairy giant China Mengniu and was taken over for $1.5 billion.

A2 Milk was next to list, in April 2015, followed by Synlait in November 2016.

The gigantic demand for their products has seen their share prices move 1,824 per cent and 178 per cent respectively.

But investors need to remember that not all dairy stocks play in the lucrative infant formula trade: it’s a highly regulated niche that some companies, such as Keytone Dairy (ASX:KTD), do not play in specifically for that reason.

Where it all came from

Infant formula dates all the way back to 1865, a time during which women who were not able to breastfeed often employed a wet nurse — another woman who could breastfeed — to ensure her children were well fed.

That was until German chemist Justus von Liebig developed, patented and marketed an infant food, first in a liquid form but then moving to a powdered form as it prolonged preservation.

His formula consisted of cow’s milk, wheat and malt flour and potassium bicarbonate.

(Modern formula is also made with cow’s milk but is supplemented with a stack of additives necessary for healthy growing babies, including protein, fat, Vitamins A, C, D, E and K, carbohydrates and nucleotides, among others.)

As preservation techniques, scientific knowledge, manufacturing practices grew steadily throughout the 20th century, so did the demand for and availability of the product.

By the 1970s, generic brands were being sold in addition to commercially marketed brands in American retailers.

Justus Von Liebig hard at work.

Demand drivers 

The growth of the middle class is often cited as reason for today’s booming market.

Gennadi Koutchin, a director at XEC Partners, says that growing urban populations in China and Asia are the reasons behind the long-lasting upward trend.

“More people are moving to the urban areas, working more and there is an increased reliance on some of these convenience products,” he says.

“Add to that the growth rate of the economy and the population quite simply has more money to spend. The growth has come from emerging countries and I think there is still room for it to grow further.”

“In addition, removal of China’s one-child policy and growth in the middle-class population are set to continue driving demand for quality dairy products.”

He also says that Australasia’s high product standards make Australia — and to a lesser extent New Zealand — world leaders.

“The product coming from Australia and from New Zealand is considered high quality and clean,” he says. “Lower tariffs resulting from free trade agreements further facilitate trade with China.

“Images of wide green pastures are often used to represent Australian products. Cleaner environment means cleaner feedstock and that is attractive.”

“Add to that, our proximity to the market makes a compelling supplement to domestic producers.”

A salesgirl introduces a bag of milk powder to customers China. Approximately 53,000 infants were hospitalised and at least three babies died after ingesting contaminated dairy products containing an industrial additive called melamine. Pic: China Photos

The impact of regulation

Changing international regulation also has an impact, particularly on the import and export of products.

As the industry began to boom from 2015 through 2017, strong demand necessitated lots of supply. And as with all burgeoning industries or disruptions, it took some time for regulation to catch up.

Paul Jensz, executive director of research at PAC Partners, says while that resulted in early opportunity with a see-what-sticks attitude, it began to cause confusion.

“We had a situation where it was in flux a lot of 2017, and the Chinese authorities, quite rightly, tried to bring down the number of brands and provide differentiation between the thousands of products,” he says.

“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.”

From January 1 last year, the infant formula registration requirements in the new Food Safety Law came fully into force.

Infant formula products, either domestically manufactured or imported, must obtain formula registration before they can be sold in China. That includes registration from the China Food and Drug Administration (CFDA), now renamed as SAMR.

In June 2019 the rules tightened again: the government set a self-sufficiency target for China-made infant formula of 60 per cent or above within three years (it was 47 per cent), announced a zero-tolerance policy on unregistered infant formula, and signalled that stricter supervision was coming in around ecommerce and registration for formula being sold into China.

Though some may view increased regulation as anti-competitive, Jensz says it has increased opportunity for serious players who are on top of their game.

“That stability… has allowed Australian listed companies to plan ahead and seek partnerships and distribution in China,” he says.

Jensz says investors looking at China-focused infant formula exporters should focus on a company’s supply chain.

“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,” he says. “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.”

Lucrative market

The infant formula market surpassed $70 billion in 2017, according to industry researcher Research and Markets.

And with the above driving factors set to continue, that figure is forecast to hit $98 billion by 2023, for a compound annual growth rate of 5.5 per cent over the coming years.

A 2017 Deloitte report also found that trust in domestic Chinese infant formula brands had remained low since 2008, when six infants died and 54,000 were hospitalised due to the contamination of formula with melamine.

That has led to the growth of the daigou, a word translating to ‘buying on behalf of’. It describes people who purchase Australian dairy products and send it back to China.

A Nielsen report pointed out there are up to 200,000 daigous operating in Australia, with some estimates of sales of up to $100 billion annually across the wider retail sector.

ASX listed infant formula and dairy stocks

There are around 16 ASX-listed stocks dabbling in infant formula, including the three big boys, or what we’ve affectionately labelled the baby bottle crew.

Below we profile some of the brightest names in the small cap end of the sector.

Swipe or scroll to reveal full table. Click headings to sort

ASX code Company Market cap
NUC NUCHEV LTD $169.2M
BFC BESTON GLOBAL FOOD CO LTD $35.5M
AU8 AUMAKE INTERNATIONAL LTD $36.6M
LON LONGTABLE GROUP LTD $30.0M
AHF AUSTRALIAN DAIRY NUTRITIONAL $39.0M
A2M A2 MILK CO LTD $10.8B
BAL BELLAMY'S AUSTRALIA LTD $1.5B
JAT JATENERGY LTD $41.3M
BUB BUBS AUSTRALIA LTD $503.8M
SM1 SYNLAIT MILK LTD $1.6B
KTD KEYTONE DAIRY CORP LTD $81.7M
BXN BIOXYNE LTD $9.0M
CLV CLOVER CORP LTD $420.8M
HRL HRL HOLDINGS LTD $49.3M
WHA WATTLE HEALTH AUSTRALIA LTD $98.2M

Australian Dairy Nutritionals (ASX:AHF)

Until recently known as Australian Dairy Farms, Australian Dairy Nutritionals got the go ahead to change its name from shareholders at its annual general meeting.

It is a vertically integrated Australian dairy group which owns high-quality dairy farms and a processing facility in South Western Victoria, the so-called ‘golden triangle’ of Australia’s dairy industry.

It produces premium quality, branded dairy products using milk sourced fresh from its farms.

It bought Flahey’s Nutritionals as a “key step in entering the dairy nutritionals and infant/toddler formula market” and in 2019 bought an infant formula plant, which it moved to its Camperdown Dairy Park as stage one of an infant formula project.

AuMake International (ASX:AU8)

AuMake is one of the baby bottle crew focusing on the daigou market, as outlined above.

It describes itself as a retail company, connecting Australian suppliers with not only daigou but also the significant Chinese tourist market.

Aside from infant and baby formula, it also offers healthcare and food supplements, skin, body care and cosmetics and wool and leather products.

It hires bilingual staff and also utilises three of the biggest Chinese payment platforms in WeChat, Alipay and UnionPay as well as providing logistics assistance for those sending to China.

Back in November 2018, AuMake said China’s stringent new ecommerce laws would strengthen its business and in June said the new rules would not affect it.

AuMake bought an inbound Chinese tourist retailer network called Broadway in mid 2019 and at the end of the year reported its best financial performance since listing: positive EBITDA, October and November revenue of $18m (September 2019 quarter: $18.5m), and gross margin above 20 per cent (September 2019 quarter: 17.2 per cent).

Bubs Australia (ASX:BUB)

It should come as no surprise that a company going by the name of Bubs dabbles in infant formula.

Bubs Australia is the country’s only vertically integrated producer of goat milk infant formula, but has been joined by Nuchev (ASX:NUC) in the goat milk game generally.

It hopes to inspire “new generations of happy, healthy bubs through its range of Australian made premium infant nutrition products”, which are specifically made to make the most of their first 1,000 days of living.

It also makes fresh goat milk, yoghurt and Jersey milks which are sold in supermarkets and chemists here and exported to China, Southeast Asia and the Middle East.

In 2019 the company went deep on China, doing deals with Alibaba, Tmall and Beingmate as well as buying a CNCA approved infant formula dairy in Deloraine. It also moved its HQ to Victoria and raised $30m to give it some financial powder to play with.

Bioxyne (ASX:BXN) 

Bioxyne describes itself as a health and wellness company, focusing on “clinically effective health and wellness products particularly in the gut and immune health areas”.

Its shares rocketed in December 2017 when it announced that it was moving into infant formula, a move it is yet to complete.

The products behind the fuss were dairy-based drinks under the BK18 brand with immune-boosting probiotics, for infants as well as the rest of the family.

Clover Corp (ASX:CLV)

Infant formula has been a boon for Clover Corp, which makes oils and powders that can be added to foods, including milk powder.

It more than doubled its profit for the 2018 financial year thanks to China’s enthusiasm for infant formula, going from $3.6m to $7.6m, and then delivered again in FY19 with a $10.1m profit.

And in November 2018 it sought to become one of the biggest players in the field by taking a 35 per cent stake in New Zealand company Melody Dairies — giving it access to a multi-million-dollar industrial spray dryer that can convert large volumes of liquid into dried forms for ease of use, transport and storage.

Nuchev (ASX:NUC)

Nuchev is the newest formula stock, debuting at a 23 per cent premium to its listing price in December 2019.

The northern Victoria goat milk farmer makes infant, toddler, and adult milk powder formulations sold under a brand called Oli6. It sells to daigous in China and Hong Kong, and in Australia to companies such as Coles and Chemist Warehouse.

The Tmall, JD.com and Kaola ecommerce platforms are important Chinese market distribution channels, with Nuchev able to ship its products from the Hong Kong special area to mainland China.

Wattle Health (ASX:WHA)

Shares in Wattle Health jumped 22 per cent back in June 2018 when it signed a $34m Chinese infant formula deal, before falling back to around 50c, 18 months later.

The company produces nutritional milk formulas for babies and toddlers.

In April 2018, Wattle signed a deal with China’s International Supplies and Distribution Company to sell its products into mainland China, and also announced a $78m joint venture with Organic Dairy Farmers of Australia (ODFA) and Niche Dairy to design, construct and operate an organic spray drying facility in Australia.

In 2019 it secured what it said was Australia’s first organic A2 milk supply for the facility and spent a significant portion of the year trying to buy Blend & Pack, a CNCA accredited nutritional dairy manufacturing facility. Wattle tried to fund it with debt, but has since moved on to a rights issue, tapping shareholders for $62m.

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