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The a2 Milk Company Ltd share price is rocketing on Chinese demand

The a2 Milk Company Ltd (ASX: A2M) share price opened 5% higher this morning to hit a new record high of $3.13 after the group upgraded its full year revenue guidance thanks to ballooning demand for its a2 Platinum infant formula products from Chinese consumers.

Until today the group had informed the market to expect second-half revenues to come in lower than first-half revenues of $256.1 million, but the new forecast for full year revenues around $525 million means it now expects second half revenues up around 3.5% on the prior half.

The a2 infant formula’s brand power is growing alongside its popularity as a product that only contains the a2 milk protein that is believed to offer health and digestive benefits for lactose intolerant individuals in particular. Generally, it’s believed Asians suffer from higher degrees of lactose intolerance than other consumers, which may explain some of the sales strength in the giant Chinese market.

Outside China, the company’s other international growth markets are the United States and United Kingdom, with a2 Milk posting positive operating earnings for the half-year ending December 31 2016 in the UK.

In the UK and US it’s focused on selling its ‘a2 Milk’ brand that is commonly found on major supermarket shelves in Australia such as the Wesfarmers Ltd (ASX: WES) operated Coles, or Woolworths Limited (ASX: WOW).

Australia in particular has been a runaway success story for “a2 Milk” sales, as consumers buy into the reported health benefits and superior taste to cheap supermarket milk. If the group is able to replicate its Australian success overseas its share price may steam far higher over the years ahead.

A2’s success over the past 9 months also puts into perspective the problems at its baby formula manufacturing rival Bellamy’s Australia Ltd (ASX: BAL). It has seen its share price collapse in half over the past year after a series of embarrassing trading updates and admissions as to the Tasmania-based company’s underlying performance.

Unfortunately for investors, a2’s potential to grow sales is no secret, with the stock trading on around 38x analysts’ estimates for full year earnings per share. These estimates may come in for some upward revisions this week, but the stock still looks fully priced in my opinion despite some exciting long-term growth potential.

I would probably rate it a hold at today’s valuation, but would not be surprised to see it move higher from $3.13 in the weeks ahead.

a2 offers growth potential, but the valuation is a bit rich and the dividend extremely skinny!

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Motley Fool contributor Tom Richardson owns shares of A2 Milk.

You can find Tom on Twitter @tommyr345

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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