China represents A2 Milk’s largest market outside of Australia and a key growth avenue for the company. Lately, the A2M share price has underperformed the market due to the possibility of A2M milk dragged into the list of import products shadowbanned by the Chinese government. A2M dividends look reasonably covered as the dividend payout ratio is only a small portion of its total earnings.
Over the last three months, there has been a consistent drip of bad news on the rocky Australian and China trade relationship. The headlines and the tone clearly show that China is unhappy with how Australians conducted itself in raising the issue of investigating the origin of Covid.
A2M Dividend Yield
A2M Revenues from China
The purple and light brown portion of the A2M revenue breakdown shows that China makes up half of the total revenues. If milk product is added to the list of unofficial list of Australian products “discouraged” to be imported, it will make a material impact on A2M revenues.
Note the company reports its results and presentation in New Zealand dollars because A2M’s primary listing is on the New Zealand stock exchange (NZX 50). Still, it is dual-listed on the Australian Stock Exchange.
The A2M share price performance shows that the market is already taking this view into account as the shares have underperformed the rest of the companies in the ASX 30, the 30 largest companies listed on the ASX.
Will A2 Milk be banned in China?
The main driver in the sell-off A2M shares is that the market anticipates milk exports from Australia to be included in the shadowban list. China will never officially come out and ban Australian products, but that is not how China operates.
The Chinese government will get its message out via unofficial discussions with importers to discourage Australian products’ importation as they would see issues going through customs. The astute importers will get the message and shift their order book from Australia to other countries in their self-interest from wanting limited disruption to their business. In some instances, it is to cut off your nose to spite your face.
The one upshot of this is A2 milk, unlike that the products that have been shadowbanned so far, which have been commodities, cannot be easily replaced from elsewhere. The primary users of these bulk commodity products are businesses channel, and it is easy for the Chinese government to issue unofficial directives to cancel their Australian orders.
A2 milk, on the other hand, is a consumer product, and it is increasingly shifting to direct to consumer channels or smaller importers such as the daigu channel. The benefit of this is that it is harder for the Chinese government to discourage imports on a larger scale. That is not to say they won’t try via onerous customs rules, but then it will be more obvious. The critical point of the latest shadow ban is that it is intended to send a message to the Australian government while at the same time leaving no footprint behind.
We think given the differentiation of the product and local consumer distrust of local brands, A2 milk could be more resilient than you think.
A2M Dividend History
[wpdatatable id=197] A2M dividend dates are July and December