The A2 Milk Company Ltd (ASX: A2M) share price continued to decline in April. We take a look at the stories that affected it over the month.
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The A2 Milk Company Ltd (ASX: A2M) share price continued to decline in April. From close of trade on 31 March to close of trade on Friday, shares in the New Zealand dairy company fell 7.8% to end the month at $7.22. Over the same time, the S&P/ASX 200 Index increased by 3.4%.
The company has struggled since Australia’s borders were closed down at the onset of the COVID-19 pandemic. A2 Milk shares have fallen 60.4% over the last 12 months, with the dairy producer heavily reliant on sales of its infant formula via the daigou market.
Daigou is a term that refers to a market of customers who buy products overseas (such as in Australia) and then sell and ship them to end-users in China. These entrepreneurs are usually, but not always, from the People’s Republic. Popular daigou products in Australia include Blackmores Limited (ASX: BKL) vitamins and the aforementioned infant formula.
Here are a few of the major stories that had an impact on the A2 Milk share price last month.
What hit the A2 Milk share price in April?
Broader border uncertainty
Australia’s international border situation remained as clear as mud during the month of April. While Prime Minister Scott Morrison hinted the government is actively considering the border situation, there’s been no actual changes to border policy announced. Any hope of international students being able to return was dashed last month because of the delayed vaccine rollout.
A large portion of foreign students in Australia (212,000) come from the People’s Republic. They are a key component of the daigou market. Their arrival had the potential to reactivate that key market for A2 Milk, but those hopes were put to bed in April. Without this key source of revenue returning any time soon, the A2 Milk share price has continued its decline.
Declining birth rates
Also in April, Motley Fool reported on forecasts of declining birth rates. Credit Suisse says that by 2025, compared to 2018 numbers, children of infant formula age are expected to be 30% fewer.
The broker made a note of saying it expects the trend to affect the infant formula market in China. It also said it expects FY25 net profits for A2 Milk to “approach but not surpass” its FY20 peak. It placed a target on the A2 Milk share price of $7.15 – 7 cents below Friday’s close.
The Chinese market may not be the same
Separate notes out of Morgans and Citi last month were pessimistic about the Chinese infant formula market when normalcy returns.
According to Morgans, dairy prices in mainland China are not improving and there may be an excess of inventory in the country. It believes these factors could be a bigger problem than previously anticipated. In further disappointing news, Citi says Chinese consumers have grown accustomed to domestic brands in a range of products – including infant formula. This could mean, therefore, that demand for A2 formula in China may never return to the levels it was pre-pandemic.
A2 Milk share price snapshot
Despite the effects of the pandemic on the border and the economy, the A2 Milk share price was initially resilient at the beginning of the pandemic. The dairy company’s shares hit a record high of $20.05 in the midst of 2020’s chaos. Pessimism soon set in, however, with the company’s value falling during the second half of the year and continuing its decline in 2021.
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Motley Fool contributor Marc Sidarous has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended A2 Milk and Blackmores Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.