A2 confident it can weather China's regulatory changes

A2 CEO Geoff Babidge said the company was closely monitoring the evolving regulatory situation in China.

A2 Milk, which reported a massive eighty-fold increase in half-year profit yesterday, is well-placed to weather ongoing regulatory changes in China's infant formula market, says managing director Geoff Babidge.

Shares in the alternative dairy firm soared to an intra-day record of $2.60 yesterday after the firm reported the interim profit surge and boosted earnings guidance for the full-year on the back of rapidly growing sales of its Platinum baby milk brand in the Chinese and Australasian markets.

The stock, which was the best performer on the S&P/NZX50 last year, then lost ground to finish the day up 3.45 per cent at $2.10. Profit for the six months to December 31 rose to $10.1 million from $125,000 in the same period a year earlier.

A2 lifted guidance for full-year operating earnings before income, tax, depreciation, and amortisation (ebitda) of $45 million to $49 million, up from a previous forecast range of $33 million to $37 million.

Infant formula revenue in Australia, New Zealand and China rose to $73.9 million in the half-year period, a 340 per cent increase on the prior comparable period.

The majority of sales took place in the Australian grocery and pharmacy channels, the company said.

A2 Platinum, like other Australasian formula brands, has been benefiting from small-scale traders purchasing product in Australian supermarkets for re-sale via online channels in China.

As part of a major update to China's food safety laws enacted in October, a requirement was introduced for formula makers to register their brands with the China Food and Drug Administration (CFDA), bringing formula into line with pharmaceutical products.

And under proposed new rules submitted to the World Trade Organisation (WTO) last month, companies will be able to export a maximum of three baby milk brands into China.

A2 markets only one formula brand, but it remains unclear how its manufacturing partner, Synlait, may be affected by the changes.

Synlait declined to comment on the three brand limit proposal when approached by the Business Herald last month.

Babidge said A2 was closely monitoring the evolving regulatory situation in China and working with Synlait and Chinese contacts to understand the environment.

"There's been speculation about further changes to regulation around access for infant formula," he said. "In conjunction with Synlait we think we're well placed to work through that satisfactorily."

The company said it was pleased with progress in breaking into the US liquid milk market, which began in southern California in April last year and was expanded to the northern part of the state in September. A2 reported a 5 per cent lift in Australian fresh milk sales in the half-year.