Baby formula stocks are beginning to turn a new leaf after underperforming on the ASX 200 in June.
This follows the announcement that China's government was planning new rules for the regulation of baby formula imports. According to the Australian Financial Review, the main objective of the plan was to benefit Chinese baby formula producers.
On Thursday, local baby formula stocks experienced a lift in share price following an announcement out of Bubs Australia (ASX: BUB). This announcement saw the Bubs Australia share price lift 32%, with the Bellamy's Organic Australia (ASX: BAL) and A2 Milk Company Ltd (ASX: A2M) share prices also rising 5% and 2%, respectively.
What did Bubs announce yesterday?
Bubs announced a strategic channel partnership with China's leading baby store Kidswant as the first major project of the Bubs/Beingmate Joint Venture, which was established in May 2019.
This first major project kicks off with Bubs Organic food products being stocked across 275 Kidswant stores in key shopping areas in 123 cities throughout China.
This is a high-quality deal for the company that allows it to leverage Kidswant's immense Chinese network. Kidswant has the largest market share of mother and baby retail in China, as well as an active membership community of over 27 million mothers.
Bubs expects retail sales to be approximately $6 million in the first year, which is a significant figure considering the company announced HY19 gross sales of $21.03 million.
Are other baby formula companies a buy?
Market sentiment and the baby formula sector go hand-in-hand. There were days when, for example, a2 Milk would announce a strong full-year report, and the Bellamy's share price would rocket 10%. So, as expected, baby formula stocks did react strongly to the Bubs announcement. I anticipate that other baby formula stocks perceive this as a sign that there are still opportunities to continue developing their network and partnerships in China.
I am still a great believer in the a2 Milk story. The company is a growth machine with a strong foothold in the domestic baby formula and fresh milk business, while making significant efforts to drive brand awareness and benefits of scale in China.
On the flip side, I believe Bellamy's still has a lot to prove. In HY19 the company cited lower sales on the back of delays in China's State Administration for Market Regulation (SAMR) approval, reduced trade inventory and rising costs. Bellamy's recent SAMR approval was only for a non-organic product produced at ViPlus Dairy. Its existing SAMR application to produce its organic series at Camperdown remains in progress. Bellamy's is still an avoid for my portfolio, until these matters are resolved.
