How vulnerable is the A2 Milk share price amid the trade stoush?

The A2 Milk Company Ltd (ASX: A2M) share price has been largely COVID-proof, thanks to strong overseas demand. But what impact could the ongoing trade stoush have?

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The A2 Milk Company Ltd (ASX: A2M) share price has been largely COVID-proof, thanks to strong overseas demand for its formula and milk products.

Even with the company being included on the 'unreliable entity list' by the Chinese Ministry of Commerce on 19 September – which means A2 Milk could potentially get banned from trading with China in the near future – its milk products are still popular in Asia. The company posted a 33% jump in revenue for FY20, and analysts from UBS are bullish on A2 Milk, giving it a 'Buy' rating at NZ$22 per share.

A2 Milk's relationship with China

A2 Milk's sales data shows that its China sales in infant nutrition products more than doubled to NZ$337.7 million in 2020. While the UK market is struggling, the company is also playing its cards well in the US market, with a revenue growth of 91.2% to US$42.95 million in FY20.

With China clearly the biggest market for the dairy exporter, Australian consumer goods may be vulnerable to the ongoing trade war if China perceives Australia to be a US ally.

COVID-19 has cost exporters huge sums of money to get through the regulatory burdens imposed as a result of the pandemic, but A2 Milk signed a strategic agreement in 2018 with China State Farm Holding Shanghai Co. Ltd. (CSFA Shanghai). This agreement means CSFA Shanghai is A2's exclusive import agent and regulatory consultant, which has enabled A2 to continue its distribution of products to China amid the pandemic.

A2 Milk's bet on China and Asia

As one of the largest agribusinesses by market capitalisation in 2020, A2 Milk's main success comes from its huge sales growth in China and other Asian nations.

While A2's recent results announcement fell slightly short of analysts' projections, the 'Daigou' (cross-border exporting in Chinese) retail and other e-commerce channels in China and other Asian countries brought in 37.9% of total annual revenue in 1H20.  

Can A2 Milk keep up its winning streak after Babidge's retirement?

Since 2014, A2 Milk's CEO Geoff Babidge has led a successful restructuring and transformed the business into a brand-focused, leading omni-channel retailer with strong wholesale partnerships. He has now announced his retirement and HanesBrands executive David Bortolussi will take up the CEO role as Babidge's successor.

Given Bortolussi's strong supply chain experience in the apparel industry, I believe his exposure in sourcing and brand distribution in Asia will be of use. But with economic and political uncertainty looking set to continue, whether Bortolussi can keep A2's winning streak running when he takes over in 2021 is anyone's guess.

Foolish takeaway

In light of its positive sales figures, I remain bullish on the A2 Milk share price for the near future and believe the company is well placed to capitalise on the Chinese infant formula market.

In my opinion, investors should be comfortable with A2 Milk's decision to leave the UK market and focus on the Chinese and the other Asian markets. I think the popularity of foreign infant formula brands in Asia and the untapped market of Asian consumers who just want the highest quality brands for their babies will become an important shield for the A2 Milk share price against any political fallout from trade disputes.

Motley Fool contributor Miles Wu has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended 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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