A2 Milk share price: what’s the outlook as a new competitor emerges?

When Bellamys received a $1.5bn takeover bid from Chinese dairy giant Mengniu – questions of increased and condensed competition in China invariably came up for the likes of a2 Milk.

Such competitive concerns have also been apparent in the bearish price action of a2 Milk’s (ASX: A2M) share price in recent times. Specifically, since reporting its FY19 results – which saw EBITDA figures come in below analyst expectations and the revelation of an aggressive top-line growth plan – the A2M share price has fallen significantly.

At its July peak, a2 Milk traded hands at just above $17 per share.

Comparatively, a2 Milk’s share price currently trades at $11.31 per share – dropping 4.07% today alone – likely off the back of news that a Chinese-based infant formula producer – Junlebao – is set to enter the A2 infant formula space in China.

Such news is relevant to a2 Milk, given that a key aspect of the company’s unique sales proposition comes from the fact that its milk products do not contain the A1 protein. Forming part of the company’s competitive advantage and according to a2 Milk’s own website:

‘Many consumers and healthcare professionals report that certain people who experience challenges drinking conventional cows’ milk may experience benefits when they switch to a2 Milk.’

It should be noted that the scientific research backing up such claims appears scarce. Yet with a2 Milk’s revenue recently hitting NZ$1.3bn, it would seem that consumers care little for the lack of codified scientific evidence.

It certainly doesn't seem to be influencing their decisions, as A2M's growing revenues would suggest.

A2 Milk share price: the outlook

Enter Junlebao – a potential competitor to a2 Milk’s A2 Chinese throne. In a research report recently published by Citibank, the investment bank noted that Junlebao is set to launch an A2-based infant formula of its very own.

In saying that, as it stands Junlebao’s infant formula is only available for pre-order through online outlets.

Even so, Citibank further notes that to their knowledge, Junlebao is the only competing A2 formula in China that has the all-important SAMR approval. Vitally, it is this regulatory gold-stamp that allows company’s involved in the infant formula business to sell their products directly in China’s retail stores. This regulatory approval for example has proven elusive to the likes of Australian-based Bellamys.

Off the back of this news investors may potentially have begun to question: could Junlebao’s A2-based product disrupt a2 Milk’s significant growth plans?

A2 Milk’s more-than 4% share price decline today could suggest that investors are concerned by such a possibility, at the very least.

With all this in mind, Citibank maintained their sell recommendation on a2 Milk (ASX: A2M) and a share price target of A$12.20 – citing increased competition as a key driver for this bearish outlook.

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