The milk powder train looks set to roll on, but analysts have warned of tough times ahead for Bellamy's and A2 as China gets tough on imports.
In a research note, Citi analyst Sam Teeger warns of "pain before gain" to come for the listed infant formula makers, which have until now enjoyed booming sales into China.
China is the largest global market for infant formula at US$20 billion (NZ$27.98b) and is experiencing the fastest growth at around 15 per cent a year.
A2 Milk and Bellamy's generated NZ$38 million and A$62m respectively in direct China sales in 2016 financial year, and Citi estimates that will rise to NZ$222m and A$371m respectively by 2019 financial year.
But Citi, which has switched both stocks to a "sell" rating, says while the underlying demand outlook is strong, sales in the short term are likely to be volatile until January 2018 as a result of tougher China Food and Drug Administration (CFDA) regulations, increased competition and a looming oversupply.
"Recent feedback from international infant formula companies and Citi's China consumer analysts indicates the next 6-12 months is likely to be a challenging period in China," the report says.
"The strong growth that A2 Milk and Bellamy's have achieved over the last two years was enabled by e-commerce and supportive regulations favouring offshore products.
"We see new regulations as efforts by the Chinese government to ensure products are safe for consumption and to level the playing field.
"The earnings growth of A2 Milk and Bellamy's are highly dependent on Chinese sales, which we estimate represent at least 40 per cent and 50 per cent of group FY17e sales (inc. indirect sales).
"China is a major growth driver given 1) income and consumption growth; 2) declining rates of breastfeeding; 3) increased e-commerce penetration; 4) Chinese consumer preference for premium foreign products relative to domestic products.
"However, we expect China sales likely to be volatile until January 2018 and believe the geopolitical risks facing both companies should not be underestimated."
As premium brands with established customer bases in both China and Australia, Bellamy's and A2 are well positioned in the medium- to long-term, Citi says.
Recent feedback from international infant formula companies and Citi's China consumer analysts indicates the next 6-12 months is likely to be a challenging period in China.
But the next two years could remain challenging as retailers are forced to clear oversupply in products not qualified for registration under the new rules, introduced on June 8 this year by Chinese regulators.
"There are concerns about distributor destocking and price competition to clear the inventory overhang of those infant formula products not qualified for registration under the new regulation," Citi writes.
"Further, we cannot rule out the risk that A2 Milk and/or Bellamy's do not receive their CFDA certifications by the January 2018 deadline, which has the potential to lead to a short term sales hole."
Citi says assuming both companies obtain the required certifications their long-term prospects are good, but "all else being equal ... we see a better entry point to Bellamy's and A2 Milk below $10.52 and $1.30 respectively". On Monday, Bellamy's and A2 opened at $11.80 and $1.80 a share.
The report also warns of looming brand risk for A2 in its legal battle with Lion, which launched a cross claim in August - in a case commenced by A2 - that the alleged health benefits of A2 milk are false.
The matter is listed for November 2017, and parties are expected to serve evidence in support of their claims over the next year.