The market in a2 Milk shares got an attack of the vapours on the news that lumbering food giant, Nestle was about to enter the Chinese market for this type of milk.
That report is perhaps why a2 Milk Company’s shares dropped as low as $11.86 before recovering to trade down 7.5% at $12.06.
The fall was understandable given that the Chinese infant formula market is now a2’s fastest growing market with a 50% rose recorded in the six months to December 31.
a2 said in an investor presentation yesterday morning (https://thea2milkcompany.com/wp-content/uploads/The-a2-Milk-Company_Macquarie-Ag-Forum_Mar-2018.pdf) that it’s expecting marketing investment in the second half of 2018 to exceed investment made in the first half of 2018 by between $NZ35 million to $NZ40 million due to increased spending in China and the USA.
Directors also said the company continues to look at new investment ideas “including a review of opportunities to invest directly in blending and canning capability.”
That also spooked investors who hate companies investing in their future growth rather than handing the money back to greedy shareholders.
Across the Tasman, The New Zealand Herald reported yesterday morning that Nestle had confirmed that it was launching an a2-only product under its Illuma brand in China, called ‘Atwo’.
The NZ Herald later reported that Nestle had confirmed to the Herald that it was launching an A2 product. “I can confirm that we are currently launching an A2 product under the Illuma brand," a spokeswoman for the company in Sydney said in an email."
A2 milk is based around the claimed health benefits (and growing scientific evidence) of a2 milk protein milk, versus normal milk which contains a1 and a2 proteins. it is possible for competitors to create their own a2 herds and manufacture various products, following what a2 has been doing (its only natural given a2’s rapid growth and soaring share price).
Around 30% of the global dairy herd only carry the a2 protein instead of both the a1 and a2 proteins.
a2 Milk’s infant formula sales to China have taken off, and helped drive the 150% lift in December 31 half year earnings cent lift in the company’s earnings over its first-half financial result.
In yesterday’s presentation, a2 said “ China Label now represents (around( 12% of group infant formula sales, up from (around) 8% in the second half of 2016-17.”
A spokesman told the NZ Herald earlier that it had been monitoring a number of companies operating in China and considered that new entrants should assist in building credibility and awareness for the A1 protein-free proposition, and hence build the overall category more quickly.
"As a pioneer and innovator of the A1 protein-free category — with strong brand credentials, unique intellectual property and being focused solely on A1 protein free products — the company considers itself well positioned to benefit from overall category expansion," he said.
