The Wattle Health Australia Ltd (ASX: WHA) share price has soared 12.2% higher in early trade after the company finalised a legally-binding supply agreement with International Supplies and Distribution Company (ISDC) to sell its infant formula range into China.
What's are the details of the agreement?
ISDC has guaranteed minimum volumes for the first 42 months of 5.2 million product units backed with a guarantee which will supply Wattle Health's conventional cow infant formula for sale in traditional retail/general trade in China.
The expected revenue uplift for Wattle Health arising from the contract is expected to be ~$100 million for the relevant period, with the company and ISDC to set new volumes annually after the initial 42-month period which will not be less than the previous 12-month period.
The minimum volumes established with ISDC are in addition to Wattle Health's arrangements with existing customers in China, and is set to provide a big boost for the company as it looks to compete with infant formula heavyweights including A2 Milk Company Ltd (ASX: A2M) and Bellamy's Australia Ltd (ASX: BAL) in the burgeoning Chinese market.
The bank guarantee of 25% of the production cost provided by ISDC to Wattle Health will support minimum orders and can be drawn upon in the event that ISDC fails to procure the required volumes for the relevant period.
What else is happening with Wattle Health?
The company, much like Bellamy's, is still awaiting Chinese regulatory approval for its products from the State Administration for Market Regulation (SAMR) which is considered a crucial step for maximising infant formula sales in China. This approval has been a key factor behind A2 Milk's astronomic share price growth over the last 5 years which has seen it become a top S&P/ASX200 Index (ASX: XJO) stock in the last few years.
Wattle Health recently announced the acquisition of a majority stake in Blend & Pack Pty Ltd, a Chinese-accredited dairy products processing and packaging facility, for $46 million as it looks to boost its chances of gaining SAMR approval.
The company has also recently been included in the broad S&P/ASX All Ordinaries Index as of March 2019 as it has grown its market capitalisation to $159.5 million at the time of writing.
Is the Wattle Health share price a buy?
I'd prefer to look at these top growth shares before Wattle Health just based on the regulatory risk and significant competition within the Chinese infant formula market.
I'd be waiting for the likes of Wattle Health and Bellamy's to gain SAMR approval before jumping into a speculative investment, despite the strong demand for their products.
