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An October 2015 article in the venerable Wall Street Journal (WSJ) entitled Investors Pile into Baby Formula Stocks, noted as a catalyst the Chinese Government’s decision to abandon its one-child policy.  However, the authors cautioned that the gains may not be sustainable, and they proved to be accurate in their prediction.
Early ASX beneficiaries of the stampede included market darlings of the period, Bellamy’s Australia (BAL) and Blackmores Limited (BKL).  The rout began in earnest in early December of 2016 when ASX market leader Bellamy’s fell almost 44% in a single day when the company officially warned investors the pending regulatory changes announced earlier in the year by the Chinese Government were curtailing sales as smaller players unlikely to meet the new licensing requirements began discounting to reduce inventory.

Long-term oriented investors will likely notice that despite the extreme rises and falls, investors who got in as the market demand in China began to heat up have still reaped substantial share price appreciation.
In 2008 Chinese domestic producers of infant formula and other milk products began mixing melamine in their products, leading to significant health issues for thousands and the death of six infants.  
The inevitable government crackdown from the scandal and the rush to import safe products from agricultural producing countries like Australia eventually led to a flood of infant formula products, with multiple and often questionable distribution methods.  
Investors who fled from ASX manufacturers may have underestimated two key issues. First, the perceived intrusion of the government into the infant formula and food market did nothing to lower demand.  The demand for both infant formula, as shown in the first graph from Grandview Research, and for baby food as seen in the second graph from market research firm Research Nester, continues unabated.


The second factor was the reduction of competition in the market following the implementation of the new regulations.  While investors fretted over the new licensing requirements for producers, those very requirements culled smaller producers unable to meet the new standards from the market.
The new requirements went into effect in early 2018, stabilising the market until October when the Chinese Government intervened again with a new regulation requiring e-commerce distributors to guarantee the safety of products sold over their websites.
This led to another round of selling, panicky in nature for newer ASX entries into the market like Wattle Health (WHA).  Despite all this, five ASX stocks involved in the infant nutrition sector have seen massive share price appreciation over the past five years, led by current market darling, A2Milk Company (A2M).

A2Milk Company (A2M) is the clear outperformer here, with partner company Synlait Milk (SM1) the third highest performer, behind newcomer Wattle Health Australia (WHA) that has turned ice cold following its red-hot start.  The following table lists price movement information and available forward-looking financial metrics for the five companies.

The two companies with double digit earnings growth forecast are both New Zealand based, with the larger of the two, A2 Milk Company (A2M) holding an approximate 18% interest in fellow milk producer Synlait Milk Limited (SM1).  The initial infant formula supply agreement between the two companies was extended, increasing the supply Synlait provides to A2 Milk while both companies pursue sales in the Chinese market. 
A2 Milk was born in 2000, when its founder learned that milk proteins affected people in different ways, with the A2 protein more tolerable than the more common A1.  He went on to develop a way to identify cows producing the more desirable A2 protein. 
The company now operates products and trading activities in Australia, New Zealand, China, the US, the UK and a number of emerging markets in Asia, providing A2 milk along with a full line of A2 Platinum infant nutrition products from birth to three years. 
A2 Milk’s recent Half Year 2019 Financial release reported record setting results, with a 41% revenue increase and a 55.1% rise in net profit after tax (NPAT), spurred on by a 45.3% rise in infant formula sales.   In sharp contrast, the Half Year 2019 Results from rival and one-time market leader Bellamy’s Australia came in with a 25.9% fall in revenue and a 26.3% drop in NPAT.
Despite its financial success and stock price appreciation, A2 Milk has an analyst consensus UNDERPERFORM rating, due in part to concerns the company’s earnings growth in China may not be sustainable.  However, A2 Milk also saw a 20.2% increase in sales of its line of dairy products, increased its market share in all revenue categories, and is expanding its line of adult nutrition offerings. The company plans major investments in both product branding and capabilities in 2019.
Synlait Milk Limited (SM1) first listed on the NZX in 2013 before dual listing on the ASX in November of 2016.  The company supplies milk and dairy products and manufactures infant formula and adult nutrition products.  In addition, the company makes dairy ingredients, including milk powders and infant formula milk powders, for other producers. Synlait is aggressively pursuing the infant formula market, expanding its manufacturing capability with the addition of a new “infant-capable” manufacturing site.
Synlait will report its Half Year 2019 results in March.  The Full Year 2018 Results were stellar, with revenues up 15.8% and net profit just short of doubling, up from $39.5 million in FY 2017 to $79.6 million.
Clover Corporation (CLV) is an alternative for investors looking for broad exposure to the infant formula market.  The company makes Omega-3, Omega-6 and other bioactive additives used by infant formula and children’s food manufacturers, as well as nutritional and medical supplement manufacturers.  Clover is the only stock in our table with a consensus BUY rating, with two analysts covering the stock, according to Reuters. 
The stock price caught fire in March of 2018, following the release of Half Year 2018 earnings showing a 60% sales revenue increase and an outstanding 209% increase in NPAT.

Full Year 2018 Results were solid, if less spectacular, with a 32% revenue increase and an111% rise in NPAT.  The company has been in business since 1999 and is now on fire with its prized Omega rich DHA (fatty acids from cold water fish) additives.  Although the company’s current penetration in the EU market is small, that is expected to grow as the EU is requiring infant formula manufacturers to double the DNA content in formulas by 2020.
Market participants have soured on the once high-flying Wattle Health Australia (WHA) and Bubs Australia (BUB), with both generating minimal revenues and posting gargantuan losses.
Bubs listed on the ASX in January of 2017 following a reverse merger with the share price shooting up about 100% on day one before falling back to earth and then rising again.  Investors apparently were impressed with its infant formula products made from goat’s milk and an apparent ready entry to the Chinese retail market through online site JD.com.  Early coverage of the stock on some websites speculated whether Bubs would emerge from the pack as the “next A2M.”
The company’s Bubs Organic® Baby Food and Bubs® Advanced Plus+ Goat Milk Infant Formula products are now sold in “thousands of outlets across Australia as well as international markets including China, South East Asia and the Middle East,” according to their website.
While the company grew revenues from $3.9 million in FY 2017 to $16.9 million in FY 208 – an increase of 333% – the posted loss exploded from $5.1 million to $64.7 million.  The Half Year 2019 results continued the pattern – revenues increased 180% while the loss increased by 127%.  Bubs is incurring high costs from marketing expansions in China and from meeting China’s import product standards and other regulatory requirements. 
Investors giving up on Bubs might want to look at the following pictogram, showing the infant formula revenue growth in the APEJ (Asia Pacific excluding Japan) and note that Bubs increased its sales revenue in China in the 2019 Half Year by 201%.

Wattle Health Australia (WHA) is also posting substantial losses, growing from a loss of $4.2 million in FY 2017 to $19.8 million in FY 2018 while generating minimal revenue of $1.4 million.  The company has big plans and big expenses, with multiple capital raises since listing, and once was also on the list of potential “next A2Ms.”
Currently the company has three infant to toddler formulas available in its GOLDCARE+ line as well as milk powders and nutritional milk formulas.  On 1 January of this year Wattle announced the acquisition of Blend and Pack, at a cost of $46 million.  Blend and Pack is a nutritional dairy manufacturer in Australia and one of only 15 manufacturers accredited by the CNCA (Certification and Accreditation Administration of the Peoples Republic of China for the manufacture of infant formula products for the China market.
However, companies also need accreditation from the State Administration of Market Regulation (SAMR) to sell approved infant formula product in China.  
Blend and Pack’s CNCA license has been renewed and Wattle is proceeding with the lengthy approval process from the SAMR.
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