China’s dairy stocks rise: What does this mean for the A2 Milk (ASX:A2M) share price?

The A2 Milk Company Ltd (ASX: A2M) share price oculd be on watch as Chinese dairy stocks opened higher on Thursday

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The A2 Milk Company Ltd (ASX: A2M) share price could be one to watch. In particular, as Chinese dairy companies stage a strong rally on Thursday. 

Why the A2 Milk share price is on watch 

In a paper released on Wednesday, the People’s Republic of China said that it should remove all birth control and encourage people to have more children. A number of China’s listed dairy companies have worked with ASX-listed dairy companies. 

Beingmate for example, is one of the largest Chinese-owned companies in the infant nutrition industry. Its shares have climbed 10% today, but remain around all-time record lows.

In late 2020, Bubs Australia Ltd (ASX: BUB) entered a Memorandum of Understanding (MoU) with Beingmate to manufacture Bubs Goat Infant Formula made from 100 per cent Australian goat milk in China. Interestingly, Fonterra Shareholders’ Fund (ASX: FSF) also has a 2.82% shareholder in the company. 

Elsewhere, shares such as Guangxi Royal Dairy, Lanzhou Zhuangyuan Pasture, and Xinjiang Tianrun Dairy have all opened higher on Thursday. 

A potential turnaround in the share price 

Bell Potter released a note on Monday, upgrading the A2 Milk share price to a buy with a $9.50 target price. The broker observes that the company is working through its excess stock and exports to China are picking up from December 2020 lows. It believes that these early signals could indicate that the recent downgrade cycle is reversing. 

The report also highlighted A2’s expanding offline Chinese distribution. It believes that the company’s distribution points are looking to approach 30,000 in the March quarter and might mitigate the headwinds of declining China births, which is down 15% year-on-year in 2020.  

Overall, Bell Potter is pointing to a recovery that’s in its very early stages. Investors likely want to see a material improvement in the company’s financial performance following back-to-back earnings downgrades. 

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Kerry Sun 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 A2 Milk. The Motley Fool Australia has recommended BUBS AUST FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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