Could the A2 Milk Company Ltd (ASX: A2M) share price could be about to go through a large turnaround? It has already risen 11% from the bottom in May.
Why can the A2 Milk share price turn around?
It has been a terrible 12 months for A2 Milk. Over the last 12 months it has fallen 68%. Sales have plummeted after Chinese demand has fallen off. Daigou demand has largely collapsed and cross border e-commerce (CBEC) has also dropped too, as daigou are apparently important for activating that channel.
Things have been getting progressively worse for A2 Milk as it reduced guidance again and again.
But there’s a couple of signs that suggest that A2 Milk’s medium term outlook is getting better.
New Chinese child policy
As reported broadly by many news outlets, China has decided to allow couples to have up to three children if they want to, after there has been a heavy drop in the Chinese birth rate.
Things have changed quickly. In 2016, the Asian superpower ended its one-child law.
This could make a material difference for A2 Milk over time. The more children there are, the more demand there could be for A2 Milk’s premium infant formula product.
A2 Milk could certainly do with a demand boost. In the third quarter of FY21, infant nutrition sales in the ANZ segment was $99.5 million and in the CBEC channel was $22.1 million. That was a 11% and 57% respective decline on the second quarter of FY21 and a 56% and 77% respective decline on the third quarter of FY20.
Continuing strength in China label infant nutrition
Chinese label infant nutrition sales of $98 million was recorded in the third quarter of FY21 represented 5% growth on the third quarter of FY20.
Its store count increased to 22,600 and the 12-months rolling market value share in mother and baby stores (MBS) is stable at 2.4% at the end of March 2021.
I think this is a good sign for the business considering it suggests the local demand is still there. It’s just the demand of sales in ANZ that are dropping off hard. If it can just turn this round, or sell into other international markets, then A2 Milk could be a turnaround opportunity. But there could be more shorter-term pain to come.
For me, I’d rather look for ASX growth shares in the tech space that might generate higher margins.
