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Why the A2 Milk Company Ltd (ASX:A2M) share price is charging higher today

Source: Company presentation

Although the market is flying higher today after positive trade talks between the United States and China, the A2 Milk Company Ltd (ASX: A2M) share price has outperformed the market with a gain of almost 5% to $10.29.

This gain means the infant formula company’s shares have now pushed over 37% higher since the start of the year.

Why is the a2 Milk Company’s share price charging higher?

I suspect that the majority of today’s gain is attributable to the positive trade talks between Presidents Trump and Xi.

There had been concerns that Australia was at risk of becoming collateral damage in the escalating U.S.-China trade war, so any easing in tensions is a big positive for companies exporting to China.

Unsurprisingly, fellow exporters Bellamy’s Australia Ltd (ASX: BAL), Blackmores Limited (ASX: BKL), and Treasury Wine Estates Ltd (ASX: TWE) are also posting sizeable gains today.

But in addition to this, a2 Milk Company’s shares could be getting a lift after the company responded to further implementation policy guidance provided by the Chinese Government on Friday regarding the new cross-border e-commerce (CBEC) law.

The company welcomed the guidance, stating that it “continues to demonstrate the Chinese Government’s support of this channel, with a strong focus on improving channel transparency and protecting the rights and safety of consumers.”

One positive relates to English label products. According to the release: “English label products that comply with the regulations of the country of origin will continue to be sold through CBEC, provided the CBEC participant provides the consumer with: access to an electronic Chinese translation of the packaging label; and notification that the products comply with the regulations of the country of origin, but not necessarily with those of China.”

There will be a requirement introduced for consumers to electronically acknowledge their understanding of such notification before placing an order.

In addition to this, there is a requirement for adequate product traceability systems, return and exchange services, product recall systems, product quality, and safety risk prevention and control mechanisms, and consumer dispute handling processes.

And finally, real-time reporting of transaction, payment, and logistics information electronically to China Customs will be required.

The new e-commerce law will come into effect from January 1 2019, though the policy provides for a three-month grace period to March 31 2019. This is to ensure that there is a smooth transition by CBEC companies to meet the new regulatory requirements.

Management advised that both the company and its major trading partners selling English label products to Chinese consumers are “confident all requirements will be met on or before 31 March 2019.”

Should you invest?

While I would probably choose Bellamy’s ahead of it on valuation grounds, I still feel that a2 Milk Company could prove to be a rewarding buy and hold investment. Especially given how favourable these new ecommerce laws have turned out to be.

All in all, I believe the company is well-positioned to continue its strong earnings growth for many years to come and expect this to lead to solid returns in the future.

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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 and has recommended Blackmores Limited and Treasury Wine Estates Limited. 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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