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Bubs share price trading at a 5-month low. Is this a buying opportunity?

baby, milk, formula, bellamy's, bubs

Investing in quality ASX shares for the long-haul is a great way to build wealth. Bubs Australia Ltd (ASX: BUB) listed on the ASX in 2017 with a price of just 10 cents per share. At the time of writing, the Bubs share price is trading at 86 cents, up 3.59%. That’s an increase of 860% in three short years.

While the manufacturer of infant formula and organic food has been making tailwinds in recent years, the Bubs share price has taken a hit since reporting its full-year results last month.

With the Bubs share price hovering at a 5-month low, has this created a buying opportunity?

China worries

Geopolitical tensions between Australia and China have been rising the past few months, set off by our Government’s push for an independent international inquiry into the outbreak of the COVID-19 pandemic.

The relationship rift between the two countries has caused concern among Australian companies that export goods and services to China. Last month, the Chinese Ministry of Commerce told Treasury Wine Estates Ltd (ASX: TWE) it had initiated an anti-dumping investigation into Australian wine exports into China. The news sent investors panicking and the Treasury Wine share price plunged as much as 17% on the day.

Fears are growing that Bubs could be in the firing line next, among other industries that depend on sales to China. In Bubs’ FY20 report, revenue from China accounted for $36.5 million, which was 66% of total group revenue for the year. The implications are enormous should China seek to hurt Australia’s baby formula market.

China is the largest and fastest growing infant formula market in the world, valued at $55 billion.

Bub protected its access to the Chinese market by recently signing an agreement with Chinese-listed group Beingmate to manufacture Chinese-labelled infant formula at one of Beingmate’s facilities.

In addition, Bubs intends to acquire an ownership interest in the Beingmate facility to help it secure a Chinese State Administration for Market Regulation (SAMR) licence. This would allow the company to sell its products in retail outlets in China.

Capital raise

Last week, Bubs reported it had successfully completed a capital raising of $28.3 million from existing and new institutional investors. The offer price was at 80 cents per share.

Furthermore, the infant formula company launched a share purchase plan (SSP) for ordinary shareholders to buy up to $30,000 worth of new shares. The offer price of 80 cents per share represents a 5% discount on the current Bubs share price.

The funds will be used to strengthen its balance sheet and support global growth initiatives, such as a part ownership in the Beingmate manufacturing facility.

As more than 35 million new shares will be issued to the market, this will dilute Bubs shareholder value, and push the Bubs share price down.

Foolish takeaway

Bubs has been diversifying its global presence to ultimately reduce its sole reliance on China. This year, Bubs launched into new markets in Vietnam and Hong Kong with eyes on Malaysia and the Middle East in FY21.

While Bubs has identified other growth avenues that could provide promising results in the future, I will be watching the Bubs share price from the side lines.

In my opinion, I think that there are safer ASX shares at the moment that are free from being tangled up in the current political landscape.

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Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of BUBS AUST FPO. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. The Motley Fool Australia has recommended BUBS AUST FPO. 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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