On Wednesday morning, infant formula maker Bubs Australia Ltd (ASX: BUB) updated the market with an investor presentation outlining its growth strategy for the years ahead.
The presentation follows Bubs signing a landmark distribution agreement with China-focused Brilite Nutritionals and two partnership agreements with Chinese e-commerce platform Netease Kaola and leading healthcare services provider HealthOne late last month.
Accordingly, with Bubs' share price up over 33% since last week, I thought it was time to take a closer look at its long-term potential. Here's what I found.
About Bubs
Bubs listed on the ASX at the start of the year following a reverse takeover of the Infant Food Holding Company by Hillcrest Litigation Services Group. The backdoor listing led to the IPO of Bubs (as we know it today) for 10 cents per share.
Since listing, Bubs' share price has skyrocketed 470% higher (based on Tuesday's close of 47 cents) as a slew of upbeat results, positive distribution partnerships, and Chinese expansion plans buoy the maker of Australia's first organic infant formula brand.
However, with its shares trading on a price of approximately 21x sales revenue (based on its market capitalisation of $97.4 million and full-year sales of $4.7 million), I believe Bubs' execution has to be impeccable for its share price to continue moving higher.
Growth plan
Wednesday's investor presentation demonstrates management is well-attuned to this expectation.
Like peers A2 Milk Company Ltd (ASX: A2M) and Bellamy's Australia Ltd (ASX: BAL) have already done, Bubs is pushing forward with aggressive expansion into the high-growth Chinese infant formula market by targeting specific segments of the market.
Based on AC Nielsen statistics, Bubs' management reported that sales in China's mother and baby stores and B2C eCommerce channels represents a lion's share of 68% of total sales of infant milk formula in China (by value).
Accordingly, with Bubs recently inking two ground breaking agreements to provide mother and baby store distribution (through Brilite Nutritionals) and strengthen its eCommerce offerings (through Netease Kaola), I believe Bubs remains poised to achieve greatness in the Chinese market. This is positive for its share price.
Should you buy?
Although Bubs' share price could soar higher from current levels if management delivers on its strategy, the key risk for investors is the requirement of regulatory approval for sales in mainland China from the Chinese Food & Drug Administration (CFDA).
Broadly, from 1 January 2018, sales of all infant formula in China will be permitted only if the formula has received approval from the CFDA. This requires the formula to be unique/distinctly different to existing formulations.
Whilst Bubs is in the process of obtaining the requisite registrations, failure of this key hurdle could see its share price tumble lower.
Foolish takeaway
Bubs remains a speculative stock which has the potential to provide 10-fold returns if management is successful on its execution strategy. However, like any high-reward stock, the risk is equally as large with its share price subject to falls if management misses its mark.
