Announcement driven., page-84

sometimes you have to anticipate the change in fundamentals, not wait for an announcement.

A2M is a growth stock and at AUD11+ it had significant future growth priced in. Any hint of this growth being disrupted and it had the potential to sell off. The hint in this case was the change in CBEC regs being implemented.

When the CBEC changes were announced many in the market were anticipating they wouldn't actually be implemented on Jan 1, 19 and in fact the grace period would be extended again. The closer you get to Jan1, 19 without an extension being announced the greater the risk they'll get implemented as is. As it stands the CBEC changes appear to say only China labeled products can be sold through this channel. Is that SAMR approved product or English label product with a china language sticker stuck on it? What does it mean for the daigou trade, which as we all know makes up the bulk of sales of a2 Platinum IF? Who knows but once thing is for sure it creates uncertainty. A2M don't know. As recently as two weeks ago (I asked them) they were waiting for clarification. How do they manage this with Synlait given IF production lead times? Which label do they produce and in what quantities?

A2M have ramped up their production of China label product for distribution through the bricks and mortar stores in China. As we know this product retails for significantly more than ANZ label product due to the inclusion of lactoferrin. It almost certainly gives A2M a greater margin but will it pick up the slack if demand via the other channels is disrupted? Maybe, maybe not. The reality is that A2M may be dependent on the China label taking off in FY19 just to meet forecast growth if the daigou channel is disrupted.

1Q19 sales will be good and so, most likely, will 2Q19. Thereafter there is some doubt.

The change to China label via CBEC and through bricks and mortar stores in China will be good for A2M in Fy20 and beyond imo. Short term however I don't know the effect and neither does any one else. Thus it is risk off for now.