The brand a2 Milk built in China was wholesome, but now the share price has just fallen into a hole. Photo: A2 Milk

Once the largest company by market capitalisation on the NZX, A2 Milk’s run has been derailed by Covid and its strained Chinese daigou channel. 

A2 Milk’s meteoric rise surprised everyone when it became the largest company on the NZX in 2018, with a market capitalisation of $9 billion. 

This week, A2 Milk is still a big player on the NZX, but its market capitalisation has fallen to about $5b.  And its share price has fallen from an all time high of $21.50 last July to $7.60 in May, a 60 percent drop since the same time last year.

Can it rise again? The A2 Milk share price has made a small bounce since last week. UBS volunteered a “buy” rating for A2 Milk, premised on the hope of a meaningful recovery in daigou infant formula sales and substantial market share gains in China over the next two years. But other brokers like Citi and Credit Suisse were dubious.

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A2 Milk had posted a 35 percent drop in profit to $120 million in the six months to December, blaming Covid-19 disrupting its Chinese daigou trade.

According to China dairy market consultant Jane Li, though, the A2 Milk company’s problems preceded Covid-19, particularly in terms of its relationship with daigou and significantly high wholesale prices. “The pandemic accelerated their downfall,” Li said. 

A2 milk is bigger than just one company – but the original A2 Milk Company has long been the market leader. The development of A2 milk began in New Zealand when scientist Professor Sir Bob Elliott  identified the benefits of breeding cows that produced the alternative A2 beta-casein to reduce the childhood incidence of Type-1 diabetes and heart disease.

The A2 Milk Company quickly went global. When Australia ratified its free trade deal with China, Scott Morrison marked the occasion by visiting A2 Milk Company’s processing facility in New South Wales and posing for the cameras in front of a milk tanker.

Australia’s Scott Morrison and Smeaton Grange MP Russell Mathson sing the praises of A2 Milk as the face of the country’s free trade deal with China. Photo: Supplied

China has been A2 Milk’s main focus for years and it was selling to the nation’s 1.4 billion population through the daigou reseller channel. Daigous are personal shoppers. They started out as Chinese tourists or students who would take products from New Zealand back to China and then sell them with commission.

But the daigou channel has formalised, with professionals selling products through word-of-mouth referrals. Individual daigous were essentially competitors of e-commerce retailers.

Daigous made A2 Milk popular in China.

Li, who is in regular communication with daigou sales people in China, said in recent years as A2 Milk diversified its marketing and sales channels by selling through platforms like JD and Alibaba’s Tmall, daigous lost profit to the e-commerce behemoths.

“This comes back to the fundamentals. They didn’t look after their relationship with daigous well.

“They moved onto working with Alibaba and these platforms, essentially cutting out the daigous because they had direct sourcing. But you can’t forget these small daigous are thousands of sales people promoting their products through word of mouth,” Li said.

In its six month report published in February, A2 Milk attributed its poor sales to closed borders restricting daigous from travelling to China, “subdued online pricing and channel inventory unwinding” resulting in daigou/resellers being “slower to fully re-enter the market to promote the brand”.

Daigou resellers are used by New Zealand companies to market to Chinese consumers they wouldn’t typically be able to reach.

The disruption experienced in the daigou channel impacted all products in its nutritional products with revenue declining 36.2 percent to $26.5m.

Li, whose retail company in China used to buy A2 Milk’s baby formula, said the company needed to work hard to win back its diagou trade because in-store stockists found it too expensive to sell its baby formula.

“In China A2 Milk baby formula was sold for about NZ$50 a tin, but wholesalers paid $70 per tin, and with markups, retailed for at least $100 in store.”

She said due to the pandemic many daigou were buying international products locally and reselling them. 

“The thousands and thousands of sales people who used to sell A2 to millions of Chinese parents are now pushing something else they can make money from.”

“The only way for their share price to come back is for their China business to do well again.”

Hamilton Hindin Greene investment advisor Mark Hampton said A2 Milk had been a “big question mark” for investors.

Shareholders lost confidence in the company last year when it announced three downgrades, after a promising 2019/20 end of year result in August. But in addition to that, a number of executives also sold out ahead of the company downgrading its guidance.

Last week Hampton said speculation in the market was there could be another downgrade. 

“We haven’t seen any marked turnaround. We’re not suddenly seeing more flights to China so people are expecting to see another downgrade coming. 

“Some brokers says they’re starting to see a turnaround, but for every one you see there’s another saying there hasn’t been a turnaround and another downgrade’s coming.”

On Monday A2 Milk announced a fourth earnings downgrade to the NZX as well as news its Asia Pacific chief executive Peter Nathan was resigning. 

The milk company was forecasting revenue for 2021 of $1.20b to $1.25b, down from an earlier forecast of $1.4b in February.

Despite a loss in confidence, Hampton said A2 Milk’s branding was still in good health.

Hampton said A2 Milk had told the market it was trying to reactivate its daigou channel because of how valuable it was in China through incentives. 

In its interim report A2 said it hoped to re-activate the channel by providing temporary support to daigous, working with corporate daigou to drive innovation in distribution.

A2 Milk was not available for an interview.

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