The A2 Milk Company Ltd (ASX: A2M) share price has fallen just shy of 50% in the past six months to $10.37 at the time of writing.
Here, I present the bull case for the company and why it may not all be negative.
Temporary setback, permanent share price plummet
A2 Milk’s steep share price depreciation stems from reduced demand from Cross Border E-Commerce (CBEC), retail, and corporate daigou channels as a result of a global shutdown in air travel.
The daigou trade network centres upon being able to purchase products in-store at the local supermarket, and then bringing these products back to China where a fee would be collected.
Given the dramatic decrease in Chinese tourism and international students, this network has been grounded to a halt.
However, the standstill of international air travel is not a structural change to the business. It will resume, and when it does, the CBEC and daigou channels should stimulate overseas demand for a2 Milk’s products.
Domiciled in New Zealand
Similar to pavlova and Russell Crowe, a2 Milk is another New Zealand success story claimed to be Australian.
However, the company was founded and originally listed on the New Zealand Stock Exchange, before being granted a dual-listing on the Australian Securities Exchange in 2015.
With the ongoing trade dispute between Australia and China, one could be forgiven for thinking a2 Milk may get caught in the crossfire.
Fortunately, all of a2 Milk’s infant formula products are sourced in New Zealand, eliminating the impact of current or future protectionist measures imposed by China on Australian goods.
United States operations record strong growth
Often forgotten by the market due to its relatively small contribution to revenue compared to China and Australia, the United States liquid milk segment recorded growth of 91.2% in FY20.
While operations remain EBITDA negative, brand awareness has more than doubled, representing an opportunity for a2 Milk to diversify revenues into new geographies.
Mother and Baby Stores (MBS) strengthen
First-half results for the MBS segment within China are set to be strong, with the company expecting 40% revenue growth compared to the previous year to complement a growing market share of 2.3%. Furthermore, both same-stores sales and the number of new stores continue to increase.
This proves that the product a2 Milk is able to import into China is performing, and underlying demand remains strong.
The verdict
Given international travel will resume, the positive growth of MBS stores, and increasing brand awareness, I believe the market has overreacted to a2 Milk’s recent earnings downgrade.
However, it’s important to be cognisant of potential downside risks. Here’s my bear case for the a2 Milk share price.
