Companies the likes of Treasury Wine Estates Ltd (ASX: TWE), Bellamy’s Australia Ltd (ASX: BAL), and A2 Milk Company Ltd (ASX: A2M) have not only performed well but received an extra ‘kick’ on the back of China.
The concept of China’s immense population, growth potential, and demand for baby formula, health and wellness products created an incredibly lucrative investment option for Australian investors.
But, as China’s growth slows and the implementation of tightened examination on Australian exporting companies, is the China dream still alive?
For baby formula companies such as A2 Milk, Bellamy’s and their suppliers such as Fonterra Shareholders’ Fund (ASX: FSF) and Synlait Milk Ltd (ASX: SM1), the process of obtaining Chinese accreditation for exporting can be a hinderance on the bottom line.
With the implementation of requirements such as the State Administration for Market Regulation (SAMR, formerly CFDA) for infant formula and Certification and Accreditation Administration (CNCA), producers can no longer simply export to China.
The progress of obtaining such requirements can be time-consuming. For example, Bellamy’s has been in the process of applying for SAMR for well over a year and adapted its business model to a so-called “China offline channel”.
I believe China will continue to refine its importing policies, particularly on “Daigou” – individuals who export goods back overseas.
At the same time, the baby formula space is becoming crowded with the likes of Wattle Health Australia Ltd (ASX: WHA) and many new entrants such as Australia Health and Nutrition (ASX: AN1) (yet to be listed), Nestle’s new infant formula range and more.
Should you buy A2 Milk or Bellamy’s shares?
I still strongly believe A2 Milk is an incredible company, while Bellamy’s is still going through a transitional phase of obtaining SAMR accreditation and rebranding.
However, in a recent note out of Bell Potter, they seem convinced that analysts and investors have become too enthusiastic about growth prospects for A2 and downgraded them to a sell with a price target of $11.50.
The baby formula sector has arguably transitioned through the explosive growth and hype phase and reverted back to normalised growth and valuation. I see the sector as not a growth play but a value play. Would I buy A2 Milk at today’s prices? No. Would I buy A2 Milk at $10.00? Maybe.
NEW! The Motley Fool’s team of crack analysts has just released a timely report revealing the names and codes of their top 3 dividend share recommendations for 2019. Be among the first investors to get access—FREE, for a strictly limited time. You’ll discover the names of 3 hefty dividend paying companies with what our analysts consider to be solid growth prospects for the year ahead…
The first two currently offer fat, fully franked yields and the third is a surprising REIT offering you the chance to become a landlord with none of the hassle! If you’re looking for hot new ideas, look no further. But you do need to hurry. Snap up your free copy now, before supplies run out!
Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended 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.