One of the best performers on the local market on Tuesday has been the Bubs Australia Ltd (ASX: BUB) share price.
In early afternoon trade the goat milk infant formula and baby food company’s shares are up 7% to 91 cents. This means that Bubs’ shares are now up 20% in the space of a month.
Why are Bubs’ shares on the rise?
Investors have been fighting to get hold of Bubs Australia’s shares on the back of three major developments last week.
The first was a long-term supply agreement with a China-based supply chain and service provider New Times Asia.
New Times Asia has committed to purchasing minimum volumes of Bubs and its CapriLac products worth $17 million in sales for FY 2019. This will rise to $24 million in FY 2020 and $37 million in FY 2021.
Shortly after this announcement the company revealed that it has signed a 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.
According to the release, the entire range of infant 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.
The third development was a binding manufacturing agreement with Australia Deloraine Dairy which management feels is a critical step towards achieving China Food and Drug Administration (CFDA) registration.
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 will immediately commence the application process for CFDA registration.
Should you invest?
It’s hard to deny that these developments, and the many announced previously with distributors such as Kaola.com and JD.com, are major positives for Bubs and have positioned it to compete with infant formula giants A2 Milk Company Ltd (ASX: A2M) and Bellamy’s Australia Ltd (ASX: BAL).
But whether these developments will be able to generate sales that justify its $340 million market capitalisation is difficult to know. That will all come down to whether its products resonate well with consumers.
I’ve yet to see proof that there is significant demand in the lucrative China market for its products, though I do look forward to seeing how things develop over the coming 18 months. Especially with its newly signed New Times Asia agreement. For now, Bubs remains on my watchlist.
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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.