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A2 Milk Company Ltd (ASX:A2M) shares rocket higher despite daigou crackdown

It certainly has been an eventful week for the A2 Milk Company Ltd (ASX: A2M) share price.

It has gone from being one of the worst performers on the market on Thursday, to one of the best performers on Friday.

At lunch the infant formula and dairy company’s shares are up 9% to $9.10.

Why are a2 Milk Company’s shares on the rise today?

As well as being caught up in the broad market selloff on Thursday, the shares of a2 Milk Company, Bellamy’s Australia Ltd (ASX: BAL) and Bubs Australia Ltd (ASX: BUB) sank notably lower amid concerns over a daigou crackdown in China.

According to Bloomberg, on Wednesday luxury retailer LVMH advised that officials were inspecting grey imports at Chinese airports. This confirmed rumours on Chinese social media that the daigou industry was facing a crackdown and being forced to pay sales taxes at airports.

For those that are unaware, the daigou industry is a network of Chinese tourists or nationals living overseas that re-sell sought-after consumer goods originally purchased abroad at prices lower than those in shops in China.

Infant formula companies such as a2 Milk and Bellamy’s have benefited greatly from the daigou industry and generate a large amount of sales through the channel.

A note out of Goldman Sachs today estimates that 78% of a2 Milk’s sales and 77% of Bellamy’s sales are generated from China. Of this, 68% come through the daigou channel. As such, any crackdown could have a hugely negative impact on their performances.

According to the note, the broker believes this development has the potential to cause near-term daigou sales headwinds, but in time it suspects that consumer demand will shift more towards official sales channels and large-scale distributors. Which could “ultimately benefit those companies with strong China onshore sales or official CBEC channels.”

The broker has retained its buy rating on both a2 Milk Company and Bellamy’s.

What now?

Overall, while this is potentially bad news, I feel it has been reflected in their shares now and I continue to see them as good buy and hold investments. Though, given how quickly things can change in China, it is worth remembering that they are reasonably high risk investments.

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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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