Search by ticker code:
Generic filters

Search by ticker code:
Generic filters

Search by ticker code:
Generic filters

The bear case for the A2 Milk (ASX:A2M) share price

In a follow up to the bull case for the A2 Milk Company Ltd (ASX: A2M) share price, today I’ll be outlining the bear case against the company.

Since a high of $20.05 in June 2020, a2 Milk’s share price has effectively halved, primarily due to supply channel issues relating to its Chinese operations.

Over-reliance on China revealed 

Management downgrades of revenue and EBITDA for FY21 arose from issues pertaining to the forced shutdown of global travel impacting Cross Border E-Commerce (CBEC) and daigou channels in China.

Pre-COVID, China was on pace to overtake Australia & New Zealand (ANZ) as a2 Milk’s leading geographic sector. Revenues and EBITDA from China were growing at 65.1% and 66.6% compared to ANZ’s growth of 14.6% and 19.9%, respectively.

The rapid share price fall is symbolic of China’s importance to a2 Milk’s long-term strategy, and the subsequent market premium investors were willing to pay.

With the Chinese growth story on pause, it’s difficult to foresee the catalyst for the shares re-rating.

The resurgence of domestic brands 

The Chinese market has experienced a resurgence of local brands in recent years, on the back of increasing nationalism.

China Feihe, a local competitor to a2 Milk, has ambitiously stated it wants to capture close to one-third of the infant milk market by 2023.

The renewed interest in local brands has been somewhat countered by a2 Milk’s introduction of dual-label infant milk, which is printed in Mandarin rather than English. Nonetheless, the renewed interest in local brands may act as a headwind for future growth in the Chinese market.

No clear path to reopening 

Despite the positive news surrounding vaccines, the path remains unclear as to when international borders will re-open and the daigou trade will be able to resume activity.

Furthermore, there is no guarantee that the same level of Chinese tourists and international students – a key driver of daigou activity – will return in a post-pandemic world.

The longer borders remain closed, the larger impact this will have on the a2 Milk share price.

Mataura Valley acquisition 

In December, a2 Milk purchased a 75.1% interest in Mataura Valley Milk (MVM), a New Zealand milk manufacturer for NZ$268.5 million.

On the surface, securing future supply makes commercial sense.

However, one of the attractive features of a2 Milk was its capital-light business model. Manufacturing and production were outsourced to allow a2 Milk to focus on building its brand globally.

Moreover, MVM remains unprofitable and will require additional capital expenditure in subsequent years.

Personally, I would have preferred the company to return the NZ$268.5 million to shareholders and entered into purchase agreements to secure supply.

Now what?

While I’m keeping an eye out for any of the aforementioned bear scenarios playing out, I think a lot of the downside is already priced into the a2 Milk share price.

As a result, I think today is a good entry point for investors.

For those looking for a more positive investment case for a2 Milk, check out this article: The bull case for a2 Milk shares.

$50,000 per year in passive income from shares? Yes, please!

With interest rates UP, now could be one of the best times to start earning passive income from a portfolio. Imagine earning 4%, 5% — or more — in dividend passive income from the best shares, LICs, or ETFs… it’s like magic.

So how do the best investors do it?

Chief Investment Officer Owen Rask has just released his brand new passive income report. Owen has outlined 10 of his favourite ETFs and shares to watch, his rules for passive income investing, why he would buy ETFs before LICs and more.

You can INSTANTLY access Owen’s report — or get it emailed to you — for FREE by CLICKING HERE NOW or the button below.

Unsubscribe anytime. Read our TermsFinancial Services GuidePrivacy Policy. We’ll never sell your email address. Our company is Australian owned.

Information warning: The information on this website is published by The Rask Group Pty Ltd (ABN: 36 622 810 995) is limited to factual information or (at most) general financial advice only. That means, the information and advice does not take into account your objectives, financial situation or needs. It is not specific to you, your needs, goals or objectives. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. Please read our Terms and Conditions and Financial Services Guide before using this website. The Rask Group Pty Ltd is a Corporate Authorised Representative (#1280930) of AFSL #383169.

At the time of publishing, Lachlan does not have a financial or commercial interest in any of the companies or funds mentioned.
Skip to content