Stock Takes: Taxing time as Beijing tinkers

Stocks with exposure to China's booming e-commerce trade have settled down after copping heavy selling following yet another round of Chinese regulatory changes.

But could last week's market jitters be a taste of things to come?

First let's recap. China's tax bureau introduced a tax on imported products purchased online this month.

In another development, it issued a "positive list" of types of goods allowed to enter the country via free trade zones and be sold through e-commerce platforms.

The only problem was that some products, including long-life milk and milk powder, were left off the list, sparking market confusion and a sell-off in stocks including Australian health supplements maker Blackmores and NZX-listed infant formula marketer A2 Milk.

Speaking at an event in Shanghai last week, Blackmores chief executive Christine Holgate took a swipe at investment analysts, saying they had overstated the dangers around Chinese e-commerce regulations.

"My honest view is that this is a fantastic step forward because it is evidence of the Chinese Government's belief in the free trade zones, but someone writes 'risk' and Australia responds," the Australian Financial Review reported her as saying.

"Just because one person writes there's risk, there isn't."

Stock Takes, however, reckons the regulatory risks facing Australasian exporters with a dependence on the Chinese cross-border e-commerce market are real and many. Company valuations have skyrocketed on the back of the prospects China offers, but the whims of Beijing regulators are difficult to predict.

Grey area

This is particularly true in the infant formula space, where additional rule changes are expected.

In an April 13 research note, UBS analyst Jordan Rogers said a potential requirement for Chinese language labelling of all formula sold online in China was of greater importance to A2 than the recent tax changes.

The so-called "grey channel" has been a major driver of A2's recent sales growth in Asia's biggest economy. This involves traders purchasing product from Australian supermarkets and dispatching it to China for resale.

UBS estimates 70 per cent of A2's formula sales in Australia and New Zealand actually end up in the Asian grey market, predominantly China.

Product purchased off the shelves of Aussie retailers, of course, has English labelling.

"We believe this [Chinese labelling] requirement has the potential to be the most disruptive legislation to A2M because it would make a significant portion - probably the majority - of the grey channel unviable," Jordan said. "This regulation may not apply to parts of the C2C [consumer-to-consumer] channel that distribute English-labelled product outside free trade zones, but the share of this part of the channel may be low given the small parcel delivery method."

It's worth noting that A2 has been growing its direct formula exports to China.

Those products carry Mandarin labelling.

In a market update on Wednesday, A2 confirmed infant formula was on the "positive list" of goods allowed to be imported through free trade zones.

Managing director Geoff Babidge told the Business Herald last month that A2 was well-placed to work through regulatory changes in China.

A2 shares closed up 3c at $1.86 last night.

Coverage suspended

UBS New Zealand has been forced to suspend coverage of NZX-listed technology stocks after one of its analysts got poached by a rival broker.

The local unit of the Swiss bank told clients last week it had stopped covering Gentrack, Orion Health and Wynyard Group.

Former UBS analyst Tristan Joll, who previously covered the tech stocks, is understood to be on gardening leave after accepting a lucrative offer from First NZ Capital.

He will take up his new role in the middle of the year.

"We plan to resume coverage of the IT sector once we have found a replacement analyst," Marcus Curley, of UBS, told Stock Takes.

Meanwhile, it sounds as if First NZ is beefing up its research team, rather than replacing a departing analyst through Joll's appointment.

"No one is leaving the team," said the firm's head of research, Arie Dekker.

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