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Why Wattle Health Australia Ltd shares stormed higher today

One of the best performers in early trade has been the Wattle Health Australia Ltd (ASX: WHA) share price.

At the time of writing the fledgling baby food and infant formula company’s shares are up 5.5% to $1.99.

What happened?

This morning Wattle Health provided the market with its quarterly update which revealed a strong increase in quarterly cash receipts.

According to the release, cash receipts grew to $540,000 during the second-quarter, which is the equivalent of 58% of its total sales in FY 2017.

Whilst this is strong growth, it is from a low base and will certainly need to increase significantly over the next 12 months to justify its current market capitalisation of approximately $175 million.

To achieve this the company is looking to the China market. In November Wattle Health applied for CFDA accreditation for its conventional cow infant formula range. CFDA accreditation is needed to allow the company to sell its products in China after strict new regulations were put in place on January 1.

At this stage, A2 Milk Company Ltd (ASX: A2M) is the only ASX-listed company with accreditation.

As Wattle Health has not received any notification from the relevant authorities of any issues or foreseeable delays, management is confident that formal accreditation from the CFDA will be obtained in the near future.

Should you invest?

I believe that CFDA accreditation is merely a formality now and the company will have product on Chinese retail shelves in the near future.

The big question, though, is whether Chinese consumers will buy Wattle Health’s products. As this is largely an unknown, I plan to sit this one out until post-CFDA accreditation sales data is available.

With so much future growth built into its share price, there is a danger that things could end badly for shareholders if the product does not resonate well with Chinese consumers.

I am, however, optimistic that the company can be successful in the lucrative market and will be watching on with a keen interest.

In the meantime, here are three growth shares I would buy today.

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Motley Fool contributor James Mickleboro has no position in any of the 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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