The tiny dairy stock that skyrocketed to New Zealand's biggest on China demand

[SINGAPORE] A2 Milk Co is giving New Zealand equity stalwarts a run for their money.

In a span of about four years, its market cap has surged more than 3,000 per cent, making it New Zealand's most valuable company. It now has a value of about NZ$10.9 billion (S$10.05 billion) - that's larger than some of the mainstays of the nation's bourse such as Auckland International Airport and Fonterra Co-operative Group.

A2 Milk, with offices in Australia and New Zealand, said Wednesday that revenue from China surged 50 per cent to NZ$172 million in the first half, contributing to a 55 per cent increase in net income. It's doubling down in the Asian nation, betting it can take a bigger share of the infant-formula market from global dairy giants like Danone and Nestle SA.

The stock jumped 10 per cent on Wednesday to a fresh record and extended its rally Thursday with another 4.4 per cent climb. While investors have jumped on the dairy bandwagon for A2 Milk, not everyone's convinced that the company can win more than the 10 per cent market share in China already implied by its current valuation.

The sustainability of sales via the daigou channel, which allows cross-border exports to customers in China, is lower than going through channels like cross border ecommerce or mother-baby retail stores, Morgan Stanley analysts led by Thomas Kierath wrote in a Feb. 20 report, citing regulatory risk and potential for channel fill. Overall formula consumption market share rose to 5.7 per cent as of Dec 31 from 5.1 per cent on June 30, the company said Wednesday. A2 Milk's sales to daigou rose 55 per cent compared with the prior year, driving more than half of the total revenue growth for the first six months.

Revenue estimates imply that A2 Milk's China market share would be more than 10 per cent, which would trail Nestle but jump ahead of Danone and China's Heilongjiang Feihe Dairy Co. That "seems unlikely for a single-premium price point brand," Kierath said.


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