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Why a2 Milk Company Ltd (ASX:A2M) Shares Are Under Pressure

The a2 Milk Company Ltd (ASX: A2M) share price has been under pressure over the past few weeks following changes to regulation in China and director sales.

China Changes

In August, China announced the introduction of new regulation for foreign companies selling products into China via grey market channels, such as online or cross-border transactions (CBEC). The new laws come into effect on January 1st, 2019.

As I wrote back in August, Bellamy’s Australia Ltd (ASX: BAL) has been busy applying for the right to sell its dairy products into mainland China as the state enforces change on suppliers following concerns over poor quality control.

a2 Milk says it welcomes the changes.

Speaking with Fairfax, a2 Milk’s head of Asia Pacific Peter Nathan said,  “we have full confidence there will be no disruption to our business model“.

“We completely refute that the claim of sales loss come January 1.”

a2 Milk said in an ASX announcement: “The Company will continue to work proactively with its partners to respond to the new e-commerce law and the yet to be released implementation guidance as appropriate.”

The uncertainty appears to be one negative factor that has caught the market’s eye.

Insider Selling

Another pause for concern was the large sale of a2 Milk shares by its directors, including CEO Jayne Hrdlicka.

Ms Rask Media reported in July, Ms Hrdlicka joined a2 Milk as CEO from Qantas Airways Limited (ASX: QAN). To lure her away from the embattled airline a2 offered their new CEO “transition shares” and a cash payment.

According to the company’s ASX filing back in July, Ms Hrdlicka stood to receive a cash payment of $586,666 and 599,254 time-based rights to shares. These were not subject to performance requirements and vest between August 2018 and August 2019.

In total, Ms Hrdlicka sold $3.99 million worth of a2 Milk shares according to a filing on September 3rd. They were sold to pay down tax liabilities and for costs associated with buying a home.

Takeaway

Despite what is, in my opinion, a rather lofty transition bonus and sale of shares, some pundits might argue it would pay to give a2 Milk and its directors the benefit of the doubt because they remain large holders of shares in the company they run.

I guess we’ll find out in time.

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