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Here are 3 reasons to buy a2 Milk Company Ltd (Australia) shares

Credit: Bertalan Szürös

So far this year the a2 Milk Company Ltd (Australia) (ASX: A2M) share price has rocketed higher by over 18%, bringing its 12-month return to a whopping 46%.

Despite this gain I don’t believe it is too late to invest in the fast-growing dairy company. Here are three reasons why I think a2 Milk would be a great investment today:

Reason 1: Chinese sales.

Although rival Bellamy’s Australia Ltd (ASX: BAL) fell from grace in the massive China market at the end of last year, a2 Milk has gone from strength to strength. In its most recent half-year results the company reported a massive 348% increase in sales into China and Asia. One key driver of this growth was the company’s success online in the nation. Sales volumes of a2 Platinum more than doubled year-on-year during the Chinese Singles Day shopping event, leading to it becoming the number one infant milk formula brand on JD.com.

Reason 2: Chinese tailwinds.

Despite the success it has had, the company estimates that its share of its core market in the country is just 2.6%. In my opinion this means there is significant room for growth in the future. Especially with China’s middle class rising rapidly. According to research from McKinsey & Company, approximately 76% of China’s urban population will reach middle class status by 2022. By my estimate this means a middle class of at least 550 million people. With the one-child policy now withdrawn, I expect there will be a large number of middle class families in the market for infant formula products.

Reason 3: Value for money.

Although at 29x trailing earnings a2 Milk’s shares might look expensive compared to the market average, I think its earnings growth more than justifies the premium. Whilst there is a danger of a sell-off if the company fails to live up to the market’s high expectations, at this point in time I feel quite confident that the company will deliver another solid full-year result later this year.

For these reasons I would choose a buy and hold investment in a2 Milk ahead of rivals Bellamy’s, Bega Cheese Ltd (ASX: BGA), and Bubs Australia Ltd (ASX: BUB) today.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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