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Bubs Australia Ltd (ASX:BUB) shares jump higher on CFDA and Alibaba news

It certainly has been a positive week of trade for the Bubs Australia Ltd (ASX: BUB) share price.

In morning trade the goat milk infant formula company’s shares are up 7% to 85.5 cents. This means they have climbed a sizeable 11% this week.

Why are Bubs’ shares on the rise today?

This morning the company came to the market with two positive developments that have got investors excited.

According to the release, the company has entered into a binding manufacturing agreement with Australia Deloraine Dairy and signed a merchant services agreement with Chinese e-commerce giant Alibaba.

In respect to this first development, the company’s binding manufacturing agreement with Australia Deloraine Dairy is seen as a critical step towards achieving China Food and Drug Administration (CFDA) registration.

This is because Australia Deloraine Dairy is one of only 15 licenced facilities in Australia authorised by the Certification and Accreditation Administration of the People’s Republic of China (CNCA) to produce infant formula products eligible for import into China.

Bubs has agreed to purchase a minimum volume of 500,000 tins in the first year post-registration, with annual increments throughout the term, reaching 1.5 million tins in the fifth year. A security deposit of $1 million will be paid to the manufacturing facility in instalments on satisfaction of certain milestones, which will be refunded at the end of the term.

Bubs will immediately commence the application process for CFDA registration.

The second positive development is the merchant services agreement with Chinese e-commerce giant Alibaba. This agreement has seen Bubs open a flagship store on the company’s Tmall Global website.

The entire range of formula, organic baby food, cereals, and snacks will be sold on the platform, with management targeting global merchandise value of $1 million in the first 12 months.

Managing director, Kristy Carr, appears confident that the venture will be a success. She stated that: “We are confident that with Bubs longstanding Australian brand heritage and unique premium offering, coupled with Alibaba’s lifestyle ambassador, Jessica Rudd’s endorsement, our Flagship Store will be a great success.”

Should you invest?

I think Bubs is a very interesting company which could have a bright future ahead of it. However, at this stage I still feel it is too soon to invest even with these positive developments and the many announced previously.

That’s because, in my opinion, it is not yet known whether Chinese consumers want Bubs’ products.

If the demand is there then perhaps Bubs could be the next Bellamy’s Australia Ltd (ASX: BAL) or A2 Milk Company Ltd (ASX: A2M), but until that demand has been proven I would suggest investors sit this one out due to its lofty valuation.

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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 Scott Phillips.

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