A2 Milk is due to report its first half result on Monday. Photo / Getty Images
Infant formula marketer a2 Milk is expected to reveal that it encountered difficult trading conditions in its first half, amid a rapid decline in China's birth rate and increased competition.
The unofficial "daigou" trade in infant formula from Australia to China - formerly a key plank in a2 Milk's previously strong growth story - has been severely disrupted by Covid-19 lockdowns and travel restrictions.
In addition, a big step up in homegrown competition from companies like Feihe and Junlebao has meant infant formula in China is not nearly as lucrative for the foreign players as it once was.
The market consensus for a2 Milk, due to report on Monday, is for a net profit of $50 million for the six months to December, down from $120m in the previous corresponding period.
This week, multinational food giant Nestle said its infant nutrition division reported negative growth in 2021, hit by a sales decline in China and lower birth rates globally.
Nestle China experienced low, single-digit growth, it said. "Strong sales developments in most categories were partly offset by a sales decline in infant nutrition where turnaround initiatives continued," Nestle said in its financial report for the year.
Data out in January showed China's birth rate dived in 2021 - for a fifth consecutive year.
A2 Milk's English-label infant formula is product that is likely to have landed in China through the unofficial daigou trade channel - typically through Chinese students returning home - or through cross-border e-commerce channels.
China-label product is formula that has arrived in the People's Republic via conventional export-import means.
Broker Forsyth Barr said a2 Milk's result was likely to reveal a challenging period, with the hangover of elevated inventory levels across both English-label and China-label product weighing on its performance.
The key areas in the result would be the China-label outlook commentary, brand health measures, English-label recovery insights, the performance of a2 Milk's newly- acquired manufacturer Mataura Valley Milk, and renewal of regulatory approvals from China's State Administration for Market Regulation.
Harbour Asset Management senior analyst Oyvinn Rimer said views on a2 Milk were mixed, but that it appeared the market was expecting a decline in first-half sales of 5 to 10 per cent from the same period last year.
He said the optimists hoped that "suitcase" travel from Australia to China would re-emerge soon.
"Others are more sceptical because you still need China's borders to reopen for these travellers to make it back to China, which at this juncture looks to be a long way away," he said.
"It is probably going to look a bit messy. Once people have been through numbers, we will have a better idea of what's possible in the second half, or even next year," Rimer said.
Ebitda margins are expected to slip about 13 per cent from 27 per cent in the previous period.
Adrian Allbon, director equity research at Jarden, said a2 Milk was in a difficult position.
"While online data points via our Tmall (the Chinese-language website for business-to-consumer) analysis suggest English label pricing is stable as well as brand value share, the uncertainty remains of how much volume decline is still being experienced across all channels - both online and offline," he said in a report.
"This is inherently difficult to calibrate given Omicron disruption, the rise of domestic competition and the ongoing impact of birth rate decline."
Allbon estimates a2 Milk's first half infant formula revenues could be down 23 per cent to $405m on the previous corresponding period, with total revenues down 13 per cent to $591m.
A2 Milk, headed up by chief executive David Bortolussi, accounts for over 10 per cent of Australia's fresh milk market. The bulk of its earnings come from infant formula.
The company's share price peaked at $21.51 in 2020 before a series of mostly Covid-19 driven earnings downgrades saw it slump back into single figures.
The stock last traded at $5.66.