Shares in a2 Milk Company Limited (ASX: A2M) have risen more than 1,100% since it listed on the ASX in March 2015.
If you've missed out on a2 Milk's stellar run, you may want to check out its listed business affiliate, Synlait FPO NZX (ASX: SM1).
Synlait is a dairy processing company based in New Zealand that is a2 Milk's major supplier and also exports finished product to China. A strong business relationship exists between the two firms, with a five-year supply arrangement agreed to in August 2016.
a2 Milk acquired an 8.2% shareholding in Synlait earlier this year to further strengthen the long-term relationship. Shares in Synlait are up more than 115% over the last six months, almost keeping pace with a2 Milk during the same timeframe.
On 28 September Synlait received CFDA (China Food and Drug Administration) approval to allow export of a2 Milk's China label infant formula to continue. This was a significant step for the two companies, overcoming a regulatory hurdle that has caused issues for competitors of late as they seek ongoing access to the lucrative Chinese market.
In addition to exporting to China, Synlait supplies products to Australia and New Zealand and is in the process of gaining FDA (Food and Drug Administration) approval to sell infant formula in the United States.
The US is the second-largest infant formula market after China, and Synlait would be just the second imported brand if granted registration.
Infant formula production has become a key focus for Synlait and the company has invested significant capital to increase volume growth. The new site at Auckland and expanded Dunsandel facility is expected to alleviate previous capacity constraints by the second half of FY2018.
By increasing its profitable infant formula business, Synlait seeks to improve softening margins that have hampered profit growth despite strong increases in revenue.
Statutory net profit after tax for FY2017 grew a relatively lean 11.20% on the back of a 38.80% rise in sales. A $100m capital raising during the year also reduced earnings per share while strengthening the company's growing balance sheet.
Foolish takeaway
The Australian share market is a big fan of infant formula suppliers to China and for good reason. Synlait appears to have its Chinese regulatory risks under control to date, while future FDA approval and a focus on improving profit margins could provide the catalyst for strong share price gains over the next 12 months.
