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Bubs share price rockets 20% higher on Chinese joint venture plans

In morning trade the Bubs Australia Ltd (ASX: BUB) share price has surged higher following the release of a positive announcement.

At the time of writing the goat milk infant formula company’s shares are up 20% to 72 cents.

Why is the Bubs share price on the rise today?

This morning the company advised that it has entered into a non-binding memorandum of understanding (MOU) with Beingmate Baby & Child Food Co., Ltd with the intention of forming an eventual joint venture in Shanghai.

Beingmate is one of the largest Chinese owned enterprises in the infant and maternal nutrition industry and is listed on the Shenzhen Stock Exchange with a market cap of approximately A$1.3 billion and reported revenues of A$520 million in FY 2018.

This joint venture will distribute and promote Bubs infant formula and organic baby food products in the China market.

According to the release, both parties see merit in the strategic partnership and have a shared intention to move to a definitive form joint venture agreement next month.

If it goes ahead, Bubs is expected to supply infant formula and organic baby food products to Beingmate’s distribution network covering 30,000 Mother and Baby stores throughout China.

Beingmate already has 280 infant formula and baby food products in its portfolio and owns the largest number of registered infant formula brands in China. This includes 17 sub-brands and 51 product lines that are registered with SAMR and are currently being physically distributed throughout China.

Bubs founder and CEO, Kristy Carr, appeared to be very pleased with the potentially transformational agreement.

She said: “Beingmate’s extensive infrastructure, local knowledge, regulatory expertise and extensive domestic distribution footprint, coupled with Bubs unique premium international offering, will have the capacity to transform our business.”

Warning signs.

It is worth noting that late last year there were reports that dairy giant Fonterra was unwinding its Australian dairy joint venture with Beingmate and considering the sale of its stake in the company.

The AFR report states: “Fonterra has not yet decided whether to sell its 18.8 per cent equity stake in Beingmate, a listed Chinese dairy giant that has lost more than two-thirds of its market value in the past three years and is now seeking financial support from the Chinese government.”

This doesn’t strike me as a company that I would be overly excited about entering into a joint venture with.

Should you invest?

I’m not a fan of MOUs and would suggest investors keep their powder dry until something more official is announced.

But even then, there’s no guarantee that the joint venture will be a success given its failure with Fonterra and reported financial issues.

In light of this, I would suggest investors stick with A2 Milk Company Ltd (ASX: A2M) and Bellamy’s Australia Ltd (ASX: BAL) for now.

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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.