A2 Milk will face increased competition after domestic Chinese infant formula player Junlebao launched an A2-protein formula, Citi said in a note.
The stock is down 3.6 per cent at $12.30 and Citi maintains a sell rating on the stock as it sees downside to its consensus margins over the medium term, partly due to increasing competition in China. Other risks include an increasing focus on topline growth over short-term profitability, the investment required to capitalise on the US and China opportunities and regulatory and structural headwinds.
A2 Milk shares are up 14.4 per cent so far this year but are well off the year's high of $18.04 in July.
The Junlebao product is currently only available for pre-order on e-commerce platforms. However, it does possess State Administration for Market Regulation - SAMR - registration and will be allowed for sale in offline retail channels, such as mother and baby specialty supermarkets.
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Citi analyst Sam Teeger said it appears to be the first domestic A2-protein formula competing with the Kiwi company and only the second approved by SAMR. A2 milk comes from herds with cows that produce milk containing only the A2 beta-casein protein. Some consumers are willing to pay more for the milk as they believe it prevents the digestive problems they say they experience when drinking A1 milk.
"To our knowledge, this marks the first entry into the A2 category by a major domestic player and another registered A2 formula which, in conjunction with the category entry by Mead Johnson, Danone and Nestle, signifies increased competition for A2 Milk within its own category," Teeger said.
He also noted the milk is sourced within China, indicating that Chinese dairy farms have potentially built a reliable domestic A2-protein milk pool using herd separation techniques.
"This could suggest that other domestic brands are close to launching A2-protein formulas, should they all use the same local milk source," he added.
Junlebao is controlled by the Hebei provincial government.