The Bubs Australia Ltd (ASX: BUB) share price is up after announcing an important deal with a large daigou deal to grow Chinese sales.
Bubs is one of the largest Australian infant formula businesses, specialising in goat milk infant formula.
Bubs’ Chinese deal
The infant formula business announced that it has entered into a new share subscription agreement with Willis Trading.
Who is Willis Trading? It has been the single largest customer throughout FY21 and the first half of FY22. It’s the largest distributor for both Bubs and CapriLac brands in the corporate daigou channel. It’s a business based in Hong Kong, it is a subsidiary of Hong Kong-listed Alpha Professional. One of Alpha’s main activities is the trading of milk powder and infant nutrition to China.
Subscription agreement
Bubs has conditionally agreed to issue up to a total of 29,541,620 shares to Willis Trading if Alpha Group meets certain product purchase milestones of at least $50 million in FY22 and at least $80 million to $120 million in FY23.
If all of those shares get issued then it will represent 4.82% of Bubs’ current issued capital.
Why do this?
The overarching idea seems to be that there is a mutual benefit if this goes well. Willis Trading will financially gain from the issue of shares and growth of the Bubs share price if the daigou sales continue to rise at a strong rate. Bubs benefits from (hopefully) more sales and greater scale.
Bubs stated it closely aligns the company and its largest customer through a deeper partnership.
It’s expected to drive sustainable and profitable growth momentum in the daigou channel and rapidly expand Bubs’ Chinese consumer base.
Bubs also pointed to a new corporatised business model delivering heightened supply chain traceability and channel inventory transparency.
Management comments
Bubs founder and CEO Kristy Carr said:
The next phase of our partnership is an exceptional and innovative opportunity to deepen our engagement with the daigou channel and get closer to our end consumers in China. This strategic alliance between Bubs brand power and the channel’s deep understanding of Chinese consumers provides more direct identification of our target consumers and their product needs in real time.
Word of mouth and peer endorsement is critical in our category, and we view the daigou channel as expert community builders. Through one person, we can reach hundreds of consumers.
Final thoughts on the Bubs share price and this deal
If Bubs’ management thinks this deal will (and does) create more value than what they’re ‘giving’ away, then it’s a positive. Those sales numbers referenced in the deal would be a useful boost as long as it doesn’t simply pull forward sales.
I think Bubs is a higher-risk idea, but directly involving Chinese businesses in its success seems like a smart move to grow Chinese sales.
The Bubs share price is a lot lower than where it was in 2020, yet the revenue is growing strongly. I think the company is making the right moves to be globally successful. But it will take time.
