What does China have to do with the a2 Milk (ASX:A2M) share price?

The A2 Milk Company Ltd (ASX: A2M) share price has been sliding. We look into what China could have to do with that.
The post What does China have to do with the a2 Milk (ASX:A2M) share price? appeared first on The Motley Fool Australia. –

A2 Baby formula shares

The A2 Milk Company Ltd (ASX: A2M) share price dove over 22% last week, although it has regained some of its losses today and is up 1.13% at the time of writing.

The company’s recently released financial guidance revisions, paired with a dip in Daigou sales, seem to have spooked investors and pummelled the a2 Milk share price. 

What does ‘Daigou’ mean and why does it matter?

The term Daigou refers to the act of purchasing goods overseas to resell in mainland China. The impact of Daigou activities on the a2 Milk business is nothing new. The company mentioned the influence of “reseller channels” on its third quarter FY20 revenue back in April — Daigou falls into this category.

At a glance, Daigou’s impact on performance seems pretty straightforward. If lots of people are buying products to bring back to China, it’s good. If they aren’t spending as much money as a2 Milk expects, it’s bad.

However, when we consider the influences that are potentially impacting consumer behaviour here, specifically the effects of COVID-19, things aren’t quite as cut and dry. Further complicating matters are the trade issues currently occurring between Australia and China. Acting CEO Geoff Babdidge doesn’t seem too concerned about that though, he believes Daigou is to blame.

When discussing why the a2 Milk share price has slid (as quoted by the Australian Financial Review) Mr Babdidge said:

It is primarily about the daigou — this is the linchpin on how we established this brand in China over the last five years. The issues we are experiencing are not related to geopolitics with Australia and China.

Australia’s salty relationship with China

While Mr Babidge chooses to focus on the Daigou in his views about a2 Milk’s current share price, the elephant in the room is the trade relationship between Australia and China.

Pricing in losses expected from Daigou numbers is one thing, but predicting the future for business relationships between Australia and China is another issue, one which might loom over some investors as we move into the new year.

What’s coming up for a2 Milk?

With our sights set toward the dawn of 2021, a2 Milk will be soon be welcoming incoming CEO David Bortolussi. Mr Bortolussi joins the business following his most recent role as Group President — International Innerwear, HanesBrands.

The company has also committed a significant marketing budget to continuing its business in China and expanding in the US.

Investors will be waiting to see if these and other upcoming happenings will be enough to boost the a2 Milk share price and carry the company forward.

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Motley Fool contributor Gretchen Kennedy has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post What does China have to do with the a2 Milk (ASX:A2M) share price? appeared first on The Motley Fool Australia.

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