As relations between Australia and China grow ever more hostile, a2 Milk is emphasising its Kiwi connection.
The dual-listed alternative dairy company is based in Australia, but gets its high-margin infant formula from New Zealand's Synlait. Most of its staff are in Australia and the company has an 11 per cent share of Australia 's fresh milk market.
Individual Kiwis feature strongly on the company's share register, while Aussie institutions and fund managers dominate across the Tasman.
Some fund managers have suggested a2 Milk's sales in China might get caught up in the growing hostility between the People's Republic and Australia, which has resulted in reports of many Australian exports — from barley to wine — facing restrictions in the giant market.
The relationship began to deteriorate in 2018, amid growing concerns about Chinese political influence in various areas of Australian society. The Covid-19 pandemic has created further tensions.
Matters took a turn for the worse this week when China rejected the latest attack on its Hong Kong policy from the United States and allies such as New Zealand, saying they "should face up to the reality" that the former British colony has been returned to China.
Foreign Ministry spokesman Zhao Lijian was responding to a statement on Hong Kong issued by the US, Britain, Australia, Canada and New Zealand, which together make up the intelligence partnership known as the Five Eyes.
Nearly all of a2 Milk's China-bound product is made in New Zealand and in terms of its relations with the People's Republic, the company is as Kiwi as it gets, says chairman David Hearn.
"As far as I'm concerned, in China we are positioning ourselves as a New Zealand company," Hearn told the Herald this week after a2 Milk's annual meeting.
"It does not take away from the fact that the Australian Government has chosen to take a rather more publicly antagonistic position with China, which makes doing business for everybody - not just us - more challenging," said the British-based Hearn.
"From the outside, I don't think it suits Australia very well, because as a country it is very dependent on China as both an exporter and an importer.
"I can't see that taking on China in public is a fight that you are likely to win.
"We are busy positioning ourselves, as we truthfully are, as a New Zealand business.
"Countries always fall out," Hearn said. "The thing that is challenging about the Australian attitude to this problem is that they are conducting all their issues with China in open country.
"That's not something the Chinese find easy to deal with.
"It's perfectly reasonable that, from time to time, there will be disagreements between countries, but you need to manage them in such a way that there is a chance of creating a positive outcome.
"I think New Zealand is a lot more careful and subtle about how they exhibit their concerns, so they don't get the blowback."
A2 Milk, which has a close relationship with Synlait Milk - its sole supplier of infant formula - recently took part in Synlait's capital raising, in order to maintain its nearly 20 per cent stake in the company.
Synlait's other main shareholder, China's Bright Dairy Holdings, also took part, thereby maintaining its 39 per cent stake.
Both a2 Milk and Synlait are making moves to become less reliant on each other.
Synlait is taking on other big customers and diversifying, while a2 Milk is in the throes of taking a 75 per cent holding in Mataura Valley Milk, so it can start making formula in its own right.
Mataura Valley is majority owned by China Animal Husbandry Group, the sister company of a2 Milk's distribution partner on the mainland - China State Farm.
Hearn said a2 Milk's reinvestment in Synlait and its purchase of Mataura Valley were all about deepening its roots in New Zealand.
"We are very happy to put assets down in New Zealand," he said.
Taking over Mataura Valley was a "clear and sensible" diversification as the business continued to grow.
A2 and Synlait have been talking about becoming less reliant on each other for the past two or three years. "In many ways I'm quite glad that Synlait undertook a capital raising because it allowed us to put our money where our mouth is," said Hearn.
He said he expects the Mataura Valley deal to go through before the end of the year and for a2 Milk to take control of the plant next year.
"For New Zealand, what I would generally say is we are not only a proud New Zealand company, but we are pleased to be able to put down physical roots in New Zealand to invest heavily in the local community and in the quality of the product that can be made here."
A2 Milk's earnings outlook has been clouded by the "daigou" trade out of Australia, particularly in the state of Victoria, which has been hit hard by Covid-19 lockdowns.
Daigou, which means "buying on behalf of", covers the unofficial group of individuals who shop and send products to China for a profit.
Over the past three years, the daigou trade in a2 Milk infant formula has developed along larger corporate lines.
"We are clearly facing a significant short-term challenge - nobody would deny that," said Hearn. "But I genuinely believe that nothing that is happening at the moment is actually disturbing the fundamental things that have made this business so successful - the brand, the science and the quality of the product from New Zealand."
Once the effects of the pandemic blow over, he sees no reason why a2 Milk should change the fundamental pillars that drive the business, which is based on providing product that is free of the a1 beta protein present in standard milk.
"Our job is to navigate the storm and then I think we will return to attractive levels of growth, based in part on increased levels of investment in New Zealand."
Hearn said indications of "early green shoots" in the pressured daigou channel had emerged over the past three weeks.
Forsyth Barr analyst Chelsea Leadbetter said a2 Milk's daigou problems were temporary, and she expects a return to growth from the second half of 2021.
"Current investor focus appears firmly centred on 2021 earnings downgrade risk, which is unlikely to be resolved until the timeline of daigou reordering and realignment of channels is clearer," Leadbetter said in a research note.
Looking through the short-term earnings volatility, a2 Milk's growth prospects looked attractive, she said.