The infant formula industry worldwide is coming to terms with the birth rate in China, which fell by 5.7 per cent to 9.02m in 2023.
Synlait - which makes a2′s formula - last year received State Administration for Market Regulation (SAMR) re-registration of a2′s Chinese labelled formula at its Dunsandel facility. This means Synlait will be allowed to make and export this product for the China market until September 2027.
Analsyts said the re-registration may have helped a2′s market share in the PRC.
“Not only are the birth rate pressures in China going to be rather acute, we have also had the rather disruptive period of inventory change between the old and the new SAMR-regulated product, which has had an impact on product pricing across the market,” Forsyth Barr senior analyst Matt Montgomerie said.
“So there has been a level of discounting between most brands in China, which compounds the broader industry issues,” he said.
“But against that, the data points that we look at continue to show a2 gaining market share, which is at record levels now,” he said.
“Whilst the half year will be difficult for the industry, we think a2 will show-case a period of solid performance.”
Montgomerie expects a2 to show moderate earnings growth over the first half, and for the company to point to robust growth over the second.
He said that, given the industry pressures, the market had grown sceptical last year that a2 could perform.
“However, as the data has continued to come through, it shows a2 has continued to execute, and the share price has responded accordingly,” he said.
On top of that, China’s birth rate data was better than expected.
Simmering in the background are Synlait’s balance sheet issues, as the company seeks to sell its profitable Dairyworks business to pay down debt - $130m of which falls due on March 28.
Speculation is mounting that Synlait may soon have to raise capital.
Synlait - 20 per cent owned by a2 and 39 per cent by China’s Bright Dairy - is a2′s sole supplier of infant formula.
A2 generates a lot of cash, and Forsyth Barr estimates Monday’s result will show it has about $800m tucked away, up from $707.2m at its last balance date.
With that kind of cash, a2 could buy Synlait (market cap $155m) several times over, with change to spare.
Montgomerie will be looking for more definitive comments from a2 on its investment intentions and capital management from its interim result.
“And the ongoing Synlait scenario adds fuel to that fire.”
In the absence of news, the yield on Synlait’s NZX-listed bonds has blown out to an eye-watering 32 per cent.
Harbour Asset Management senior research analyst Oyvinn Rimer said it appeared a2′s newly licensed Chinese-labelled product was enjoying an advantage over that of its competitors, who have not yet relicensed their offerings.
“They have taken market share because there are lots of brands who have not got their licence,” he said.
“Whilst the overall market is down, there is a case for a2 being much more immune,” he said.
But Rimer said the “elephant in the room” remained cash-strapped Synlait.
“It remains an interesting black box as to how that is going to be resolved.”
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
