ATM-A2 MILK

[Shareguy]

Took advantage of the uplift in price and trimmed my position this morning.  There are a few clouds on the horizon.  I see the USA market as a great opportunity.  A good chance though that it's only short-term.

[CG]

Dumping your biggest customer because they wont agree to sell your product exclusively seems to be cutting off your nose to spite your face.  Especially since now Zhang will be 100% focused on selling Bubs instead.

Speaking of Bubs, they are also supplying A2 formula to the United States.

Also you need to understand how infant formula distribution works in the US.  Approx 50% of it is purchased and distributed via the Govt WICs programme (its free to consumers as most of it is specialty formula), the rest by market retailers.  After November, while IF on the market can stay on the market, it is by no means guaranteed that the US Govt will continue to order foreign IF (in fact, I'd say its highly unlikely once Abbott is back at full production).  However, those that are supplying the market retailers like Walmart and Target and who have locked in ongoing distribution deals are looking well set up. 

So its not just FDA approval required, its also retail distribution deals need to be signed.

A good explanation of how WICs works  is here https://www.cbpp.org/research/food-assistance/infant-formula-shortage-highlights-wics-critical-role-in-feeding-babies

Dealing with biggest client isn't always a good thing for business (Plexure comes to mind). The fact that company was able to let such client go shows that they were in a better position to negotiate. From what I understand there is no shortage of other clients who are happy to deal with a2 on their terms. Previously letting big client to run the show got them into troubles in the first place. Now a2 is taking full control of their distribution network. Mr. Zhang was given a choice to work under a2's terms or walk away. He chose latter and judging by this article it seems now he is regretting it. He can have all Bubs he wants, the thing is Bubs is nowhere near as popular as a2, does not have manufacturing capability to match a2 and does not have SAMR approval which would allow them to make official sales in China.
Anyway, was it a right move or not will be revealed in 4 weeks. If second half is better or at least same as first it will prove that it was the right move.
Everybody who is following this company is aware how stuff works in US. This approval is not about to sell extra  mil of tins it's about to establish new market. a2 is in better position to do so than other new participants because as it was mentioned before they already have established distribution network over there.

[winner (n)]

This article in BusinessDesk says A2 (and Fonterra) were too slow of the mark to make the most of shortage IF in the USA ..... not surprising

https://businessdesk.co.nz/article/primary-sector/bubs-bonanza-fonterra-and-a2-milk-miss-the-boat

[KW]

He can have all Bubs he wants, the thing is Bubs is nowhere near as popular as a2, does not have manufacturing capability to match a2 and does not have SAMR approval which would allow them to make official sales in China.

Bubs deal with Zhang - "Entered strategic equity-linked alliance with lead Daigou distributor, Willis Trading; conditional on product purchase milestones of at least $50M in FY22 and $80M to $120M in FY23".  From their 4Q 4C "China: up 523% pcp, contributing 64% of quarterly sales - Corporate Daigou sales were up 1,201% pcp".  Whereas their Q3 4C had China sales only up 8%.  Zhang clearly making a huge difference. 

BUBs (and the other Aussie) products enter the USA market tariff free under Australia's Free Trade Agreement, NZ infant formula is subject to 25% tariffs (currently suspended until December but then will be reimposed).  The FTA is probably one reason why the Australian producers were approved so quickly.  The USA doesnt have many FTAs - and none with traditional dairy producers like the EU, UK or NZ.


If you are after a high growth IF stock, I see BUBs as having the best upside share price wise, compared to A2.  Its growing sales in China, has a lock on the US market, and is much smaller in size so any increase in sales makes a proportionately outsized difference to revenue and profits.  I rode A2 from 54c to $12, and it bought me my house, hoping to do the same with BUBs and get a bach in Queenstown lol 

[CG]

Bubs deal with Zhang - "Entered strategic equity-linked alliance with lead Daigou distributor, Willis Trading; conditional on product purchase milestones of at least $50M in FY22 and $80M to $120M in FY23".  From their 4Q 4C "China: up 523% pcp, contributing 64% of quarterly sales - Corporate Daigou sales were up 1,201% pcp".  Whereas their Q3 4C had China sales only up 8%.  Zhang clearly making a huge difference. 

BUBs (and the other Aussie) products enter the USA market tariff free under Australia's Free Trade Agreement, NZ infant formula is subject to 25% tariffs (currently suspended until December but then will be reimposed).  The FTA is probably one reason why the Australian producers were approved so quickly.  The USA doesnt have many FTAs - and none with traditional dairy producers like the EU, UK or NZ.


If you are after a high growth IF stock, I see BUBs as having the best upside share price wise, compared to A2.  Its growing sales in China, has a lock on the US market, and is much smaller in size so any increase in sales makes a proportionately outsized difference to revenue and profits.  I rode A2 from 54c to $12, and it bought me my house, hoping to do the same with BUBs and get a bach in Queenstown lol 

You see, in 2020 a2 had unloaded hundreds of millions worth of their product into daigou resellers, which they thought was a wonderful thing at the time. Much later (as they had no control of distribution and had no idea what happened to product once it changed hands) they realised all those products just stuck with those resellers because they could not sell it, stop ordering, discounting, damaging the brand and the sh!t with downgrades began. The rest us they say is history. The point of this is just because mr. Zhang took a load of Bubs products and Bubs counted it as a huge sale in 4th quarter does not guaranty yet it will find its way to the end consumer. The real result of this partnership will be known probably around second quarter. So, will we see another thousand percent increases in sales to daigou, well, who knows but it will be interesting to watch. All these big percentages of small numbers might be impressive but in reality they are just smoke and mirrors.
BTW, I don't know when exactly Bubs and mr. Zhang went into agreement as it was published in 4th quarter, but if they start dealing just in that quarter it seems mr. Zhang is not up to the game as Bubs "Q4 gross revenue: $48.1m" and "Receipts from customers $30m" somewhat short of mr. Zhang's $50m, but again I'm not sure about timing. For comparison, by my calculations, even now a2 makes $15-20m a week just in infant formula sales and around $2m a week in net profit overall.
As for how FDA makes their decisions I think it's a mystery to anybody. I have my own conspiracy theory. It looks like they approve only either foreign branches of existing players or some small not very well known companies which unlikely to have any threat to existing oligopoly. Plus it looks like Bubs was nagging at FDA for some time before this crisis. But as I said it's just a theory.
I do not know who has better upside share price wise, I have no crystal ball but if a2 can execute on its new strategy and get away from been just infant formula company then anything is possible.
I won't brag about my affairs with a2 as it might make some people very jealous will only say I'm in it since way before 54c and still have plenty for the second wave.
But by all means good luck to you.

[Basil]

hoping to do the same with BUBs and get a bach in Queenstown lol 

Queenstown is to cold and to far away. I'd rather have a floating bach on the waterfront   https://www.trademe.co.nz/a/motors/boats-marine/motorboats/listing/3697595690
I reckon ATM is a strong SELL here after the recent unwarranted bounce.

[KW]

BTW, I don't know when exactly Bubs and mr. Zhang went into agreement as it was published in 4th quarter, but if they start dealing just in that quarter it seems mr. Zhang is not up to the game as Bubs "Q4 gross revenue: $48.1m" and "Receipts from customers $30m" somewhat short of mr. Zhang's $50m, but again I'm not sure about timing. For comparison, by my calculations, even now a2 makes $15-20m a week just in infant formula sales and around $2m a week in net profit overall.

Signed in March 2022.  So only one quarter of sales.  The $50M is for the first year, not first quarter.

[CG]

Signed in March 2022.  So only one quarter of sales.  The $50M is for the first year, not first quarter.

Common, "at least $50M in FY22". FY22 ended five weeks ago. Okey, $50m in 4 months, unless all 4th quarter sales is mr. Zhang sales I don't think he's gonna make it

[Left Field]

Both ATM and BUB's well positioned IMO. Both useful defensive niche stocks in a food hungry world.

TA charts hinting at an interesting trend change for both.

The law of small numbers says BUB's may be the better option in the short term.

Meanwhile ATM is regaining momentum and strengthening their Chinese distribution channels/margins while apparently also gaining market share. I don't see the USA market as a Panacea for ATM (yet)  but as they have pointed out many times in their updates, progress in USA parallels ATM's growth in the Australian market, ie slow and steady (as befits a premium niche.) We will be better informed when we see ATM's next update.

[KW]

Common, "at least $50M in FY22". FY22 ended five weeks ago. Okey, $50m in 4 months, unless all 4th quarter sales is mr. Zhang sales I don't think he's gonna make it

Sorry, my mistake.  It was for the full year not the quarter, as it included previous revenues from the group not just new revenue post the agreement.  However, it has been revised down to $44M now

"Willis Trading Limited worked with Bubs to allow for supplies of infant formula to be redirected to USA without disrupting its consumers in May and June 2022 by reducing safety stock.
Issue of shares conditional on the Alpha Group meeting an updated product purchase milestone of at least A$44 million in FY22"

[winner (n)]

Jenny Ruth on A2 and IF into the USA

While the opportunity may prove to be a short near-term benefit for A2, we view the prospect of material long-term value as unlikely."

A2 share price frenzy – but is the US formula market worth it?

https://businessdesk.co.nz/article/opinion/a2-share-price-frenzy-but-is-the-us-formula-market-worth-it

Interesting that the 'as soon as this week' comment in the AFR had a fair bit of poetic licence attached it

[Shareguy]

Doubting Thomases

Craigs Investment Partners analyst Stephen Ridgewell noted in a June report that US exports of formula could add between $6m and $9m of earnings before interest and tax to A2's results for the year ending June 2023.

"The real question is whether A2 can leverage this to establish itself in the US market in the long run," Ridgewell said.

But he noted the US formula market is much smaller than China's, and "has structurally lower margins, as well as trade barriers in the form of high tariffs and the onerous FDA approval process".

For the US market to be viable for A2 long term, the FDA would need to approve its products for sale on a long-term basis, and the US would need to axe tariffs.

"As yet, there are no signs that this will happen," Ridgewell said.

[Basil]

I think the recent share price bounce is much ado about nothing.

[Minimoke]

I think the recent share price bounce is much ado about nothing.

nice little AFR spruike. Usual shenanigans

[Basil]

nice little AFR spruike. Usual shenanigans

Someone should launch a class action law suit against them  ...actually speaking of such things I wonder how those actions are coming along against ATM ?