There are nervous times for shareholders in A2 Milk Company Ltd (ASX: A2M) as the bulls and bears are counting on next week's profit results to settle their argument on whether the stock is overpriced.
Much of the same debate also involves the Bellamy's Australia Ltd (ASX: BAL) share price, although this hasn't stopped the A2M share price and BAL share price from jumping 2.7% to $12.81 and 1.9% to $9.24, respectively, during lunch time trade.
However, there's another alternative for investors looking for exposure to the strong Chinese demand for overseas baby infant formula.
Small cap alternative
I am talking about the Clover Corporation Limited (ASX: CLV) share price, which surged nearly 6% to $1.57 at the time of writing as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index slumped 0.4% into the red.
UBS has just initiated coverage on the ASX small cap stock and it has put a "buy" recommendation and $1.80 price target on the company, which has commercialised a technology to encapsulate omega-3 (DHA/EPA) and omega-6 (ARA) oils into food items like milk powder.
"CLV is benefitting from a premiumisation of infant formula in China and new customers trialling (and continuing) to use its powders," said UBS.
"While UBS's proprietary China infant formula model points to a relatively flat volume outlook, there has been consistent uptrading, which skews volumes towards high DHA formulations (like those of CLV's customers) and should drive >5% p.a. DHA demand growth.
"Chinese DHA demand growth would likely go beyond these levels should China mandate 15+mg DHA/100kcal (draft law). The EU has mandated 20-50mg DHA/100kcal from February 2020, which we expect will add at least $7-19m (UBSe $7m) to FY23E revenues."
Regulatory tailwinds could trigger upgrades
While Clover's share price has surged nearly 23% since I wrote about the stock in May last year (click here to read the article), and the stock is fast approaching UBS's price target, the stock may still have plenty of room to run.
Clover's technology is seen to be a better way to enrich milk power with omega and UBS estimates that if the company can take a 30% share of the mandated new EU DHA volumes and a similar share in China's DHA market, these could add around $33 million extra to the company's revenue. This is more than 25% above the broker's revenue forecast for FY23.
"In addition, we have no new food & beverage product launches in our forecasts, and North American demand for DHA/EPAfortified foods could lift following the conclusion of the US government's 'First 1,000 Days' policy (expected in 2020)," said UBS.
"In our view, CLV's key downside risks are patent expiry & new competition, customer concentration, and regulatory shocks impacting demand."
