How a2 Milk became a top-five player in China’s US$30b baby formula market

A2 Milk's first-half profit was better than market expectations.

A2 Milk has claimed a top-five sales spot in China’s US$30 billion ($49b) infant formula market.

Dual-listed a2 Milk - once one of the market’s biggest companies - saw its share price rally sharply after reporting a better-than-expected 15.6 per cent increase in first-half net profit to $85.3 million.

The dairy and infant milk formula marketer says its products - which contain just the A2 beta protein - can benefit digestion compared with standard milk, which has both the A1 and A2 beta proteins.

The improvement was despite a 14 per cent decline in the size of China’s infant formula market.

A2 Milk said its top-five position - as measured by research group Kantar - was driven by record levels of marketing.

“Overall, we are pleased with our execution in a tough market,” chief executive David Bortolussi told the Herald.

“Our core market is China, and it is very pleasing to be recording growth in a market that was down 14 per cent,” he said.

A2 Milk sells just two brands in China, compared with each of its main competitors offering between 10 to 20.

The company’s English-label product mostly arrives in the PRC via the cross border e-commerce channel, while its China-label products are more likely to be sold in conventional mother and baby stores.

The two have different formulations and price points.

China-label formula is the more expensive because it contains the “pink gold” protein - lactoferrin - while the English-label formula does not.

A record market share had enabled a2 Milk to have a top-five brand position in the market overall, which was a big milestone for the company, Bortolussi said.

China-label sales were up 10 per cent over the period.

A2′s English label - which owes much of its popularity to the so-called suitcase trade, which typically involves Chinese tourists returning home from Australia ladened with formula for on-sale - had stabilised after the Covid-disrupted few years.

What the company has lost from daigou (down 18 per cent over the half) had been made up by cross border e-commerce and “offline to online” channels growing faster.

Bortolussi said brand concentration and consolidation in the Chinese market was increasing.

“The Chinese infant formula market is still relatively fragmented compared with other markets around the world,” he said.

“What will happen over time is that it will become more and more concentrated, and more and more volume will go to the leading brands,” he said.

The result showed a2 Milk was sitting on a cash mountain of $792.1m, but Bortolussi stuck to the script in terms of what the company, which does not pay a dividend, planned to do with it.

“We are prioritising balance sheet structure to support our growth strategy.”

In addition to its investment in Mataura Valley Milk facility in Southland, he said the company was looking at acquisition opportunities in New Zealand and elsewhere to deal with its supply chain capability, and to increase its access to the registered China-label market.

The company’s earnings before interest, tax depreciation and amortisation (Ebitda) were up 5.0 per cent to $113.2m, with an Ebitda margin of 13.9 per cent.

In its outlook, a2 said its full-year revenue growth guidance increased from low, to low-to-mid single-digit per cent on the prior year.

“Ebitda margin [is] expected to be broadly in line with FY23.”

Forsyth Barr senior analyst Matt Montgomerie said the result showed the company continues to be turning around under Bortolussi, who was appointed in 2021, just before the company announced a series of earnings downgrades.

“It goes to the ongoing effective execution of the company over the number of years,” he said.

“There are signs in this result that that will continue,” he said.

“This was a challenging half and they have done a good job,” he said.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.