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A2 Milk faces local competition in China

The A2 Milk Company Ltd (ASX: A2M) is facing the threat of local competition in the key Chinese market. The entry of a new local player, Junlebao Dairy, into the A2 formula space could undermine a2 Milk’s leadership position. 

a2 Milk has built a stand out position as a supplier of milk products containing only the A2 protein type, which may be easier to digest. a2 Milk launched in China in 2013 with the Chinese market accounting for nearly one third of revenue in FY19. a2 Milk products are distributed at ~16,400 mother and baby stores across China, a number which increased by 64% over FY19.

As reported in The Australian, Junlebao Dairy is the first local competitor in the A2 protein space. Junlebao was previously majority owned by China Mengniu Diary, which is currently undertaking a takeover of a2 Milk competitor Bellamy’s Australia Ltd (ASX: BAL)

Junlebao has obtained required regulatory approvals to sell its products both online and offline, meaning a2 Milk may face competition both via e-commerce platforms and through the mother and baby store channel. a2 Milk has planned increased investment in brand building and marketing in China to support a multi-channel sales strategy. 

The local competitor is using milk sourced domestically, signalling the establishment of a2 protein herds. This means that additional local businesses could seek to launch a2 protein brands using the same local milk source. And it is not just Chinese competitors that a2 needs to worry about – just last month Nestle also launched its own a2 protein baby formula product. 

a2 Milk shares have fallen 33% from highs of over $17 in July to be trading for around $11.39 currently. A set of fairly impressive end of year results were not enough for investors, who dumped the stock on their release, causing the share price to fall 13% from $16 to $13.89 in a day.

a2 Milk reported total revenue up 41.4% to $1,304.5 million in FY19. Earnings before interest, tax, depreciation, and amortisation were up 46.1% to $413.6 million, while net profit after tax NPAT was up 47% to $287.7 million. Basic earnings per share increased to 39.3 cents from 27 cents the previous year. 

Foolish takeaway

a2 Milk is accelerating its focus on and investment in China, where the dynamics of the infant formula category remain attractive. a2 Milk’s unique selling proposition, however, is no longer unique, with both local and international competitors offering consumers alternative a2 protein products. Whether a2 Milk can continue to rapidly grow market share in an increasingly crowded market remains to be seen. 

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Motley Fool contributor Kate O'Brien 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.

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Kate O'Brien