07/11/2022
A2 Milk - Frothing higher
Shares in A2 Milk have, however, caught a tailwind from the US, with the shares rallying on the announcement that the company has secured approval from the Food and Drug Administration to see its milk formula products in the US. The approval comes as America continues to experience a critical shortage of infant milk formula.
The announcement is a positive one, with A2 Milk saying it will be ‘incrementally beneficial’. It provides a foot in the door for A2 to expand its presence in the US market. Management, however, noted that it was difficult to predict the sales potential with the US a highly competitive market. Margins will also be lower (higher distribution and freight costs) than the company’s key Chinese market (which is bigger) and remains pressurised by falling birth rates (and intense competition as well).
Margins will also be lower than the company’s key Chinese market, where much investor focus remains. However there have been positive reports on this front and for markets generally.
China has approved BioNTech SE’s mNRA Covid vaccine for use amongst expats in Greater China. On a visit to Beijing German Chancellor Olaf Scholz has also canvassed the idea of using the vaccine amongst the wider population. This would be positive given China’s domestic vaccine has proven largely ineffective. There have also been reports that China is looking at ending the ‘circuit breaker’ rule whereby airlines are penalised (with a 1-2 week ban) for bringing Covid cases into the country.
A step towards normality and cooling the jets on Covid-0? This remains uncertain, with Chinese health officials claiming over the weekend that Covid-0 was set to remain in place. Investors are becoming more upbeat it seems. The Hang Seng in China rebounded 9% over the course of last week. China’s current account surplus also came in at a record US$310b over the first three quarters, up 56% on a year ago, and buoyed by investment inflows.
In any event investor appetite for A2 Milk would likely increase as an when China reopens. 'When' remains the key question.
