Standard milk contains both the a1 an a2 beta proteins.
A2 Milk was the first to market milk containing just the a2 protein, the theory being it’s better for those who have trouble digesting milk.
The company nearly collapsed in its early days, but an enthusiastic consumer response to the a2 concept in the Australian fresh milk market acted as a springboard for growth, helping to propel it into infant formula and the world’s biggest formula market – China.
Forsyth Barr analyst Matt Montgomerie said recent market share data points have been strong for a2 Milk.
“The industry data appears to be turning and anecdotes out of China are quite positive with respect to 2024 births,” he said.
“On the ground, feedback around both of these factors is quite positive too,” Montgomerie said, adding a2 Milk buying interest had mostly come from Australian investors.
A2 Milk’s return to favour started in January when China released population data for 2023.
The data showed China’s population fell for a second consecutive year in 2023, driven by a record low birth rate and a wave of Covid-19 deaths.
New births fell 5.7 per cent to 9.02 million and the birth rate was a record-low of 6.39 births per 1000 people, down from a rate of 6.77 births in 2022.
While on the surface the data made for grim reading, it was much better than the market had expected, which gave a2 Milk a boost in January.
The market then took further comfort from a2 Milk’s first-half result in February, which revealed a 15.6 per cent lift in net profit to $85.3 million.
Then came concern in the infant formula trade about China’s more stringent manufacturing standards last year.
The big challenge faced by the industry then was registration by China’s State Administration for Market Regulation.
Much to its relief, a2 Milk’s sole infant formula maker, Synlait Milk, gained successful re-registration last June for its Dunsandel plant in Canterbury.
The challenge then for infant formula companies was to manage their inventory to strike a balance between old stock and newly registered product.
A market source said a2 may have struck this balance better than some of its competitors, which have struggled with the excess inventory.
Another factor supporting the share price was the fact more big players – Vanguard Group (5 per cent) and Goldman Sachs (5.8 per cent) – took positions in the company this year.
There is also talk in the market that the English label infant category – product made offshore and sold in China through the cross-border e-commerce channel – was starting to grow again after taking a hit during the travel-constrained Covid period.
Synlait this week said Bright Dairy would provide a $130 million facility. Photo / NZ Herald
Synlait and Bright
A2 Milk has so far been quiet about the travails of its nearly 20 per cent-owned infant formula supplier, Synlait Milk, which this week was thrown another lifeline by its 39 per cent shareholder, Bright Dairy.
Its reticence is likely down to the fact that Synlait and Bright have only talked about a capital raise but have not specified any hard numbers.
Synlait this week said Bright Dairy would provide a $130m facility – subject to shareholder approval, as it would be a related party transaction.
The shareholder loan, and the future equity raise, would enable Synlait to reduce its debt to a sustainable level.
Synlait has had its profitable Dairyworks up for sale but withdrew it because offers were too low.
One source said retention of Dairyworks could ironically help make Synlait more bankable because it contributes $20m a year in Ebitda .
But the sticking point remains the loss-making Pōkeno plant, built for around $400m, and which Synlait now has up for review.
While Synlait faces challengeson several fronts, Bright Dairy is unlikely to throw in the towel any time soon.
The company is controlled by the huge food group, Bright Food, which iswholly owned by the Shanghai Municipal Government’s investment arm.
The China connection doesn’t stop there – its banking syndicate includes HSBC and China Construction Bank.
“Chinese companies would prefer to invest in a company to support them rather than take a hit on the investment and accept write-offs,” one source said.
“It’s entirely likely that Bright will continue to support them,” the source added.
While there is some wriggle room around Synlait’s banking arrangements, a hard deadline of December 17 looms for its $180m of NZX-listed bonds.
Dairyworks and Dunsandel make good money for Synlait, but Pōkeno remains a millstone.
And analysts said Pōkeno is likely to be a hard sell as China’s infant formula business is past its best.
Regarding possible buyers, Chinese dairy giant Yili already has extensive facilities in New Zealand with its ownership of Hokitika-based Westland Milk.
Another big formula company, Feihe, is a possibility as it does not have a manufacturing footprint here.
French food group Danone already has extensive facilities in New Zealand.
China’s up-and-coming infant formula play, Junlebao – already ranked third in the PRC – is not seen as a likely contender.
America’s Abbott, already one of Synlait’s customers at Pōkeno, has been mentioned as a possible outside candidate.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
