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Investors not crying over spilled China milk
- CHANTICLEER
- Jan 3 2017 at 11:00 PM
- Updated Jan 3 2017 at 11:00 PM
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Investor appetite for Australian infant formula companies seeking to break into the China market has not soured despite the run of bad luck for Bellamy's. Kylie Pickett
by Michael Smith
Investor appetite for Australian infant formula companies seeking to break into the China market has not soured despite the run of bad luck for Bellamy's Organics and vitamins maker Blackmores.
The latest firm to brave the choppy waters of Chinese regulation, Bubs Australia, listed on the Australian Securities Exchange on Tuesday. Despite the relatively small size of the first float of the calendar year, the offer was significant as it shows not everyone is running scared from China.
Bubs Australia is the new name for the company which has relisted from the shell of Hillcrest Litigation Services. The infant formula and organic baby food company has attracted an impressive line-up of investors who are well connected in China. This includes Zhang "Nancy" Zetian, the celebrity wife of Chinese billionaire Richard Liu who founded JD.com – one of the country's most popular ecommerce sites.
The Australian backers include Wattle Hill, the private equity fund run byJessica Rudd's husband Albert Tse, who was instrumental in getting Zetian on board. Ellerston Capital's Ashok Jacob is also an investor and Kerry Stokes's family investment vehicle has a small shareholding.
Bubs was seeking to raise $5.2 million at an issue price of 10 cents per share. The stock ended its first day of trading at 13.5 cents a share, a 35 per cent premium.
The listing came on the same day as Murray River Organics Group tried to reassure investors that concerns about the China market had been overplayed given the noise around Bellamy's which will not trade again until January 13.
Murray River, which produces organic dried fruit, says it is not reliant on sales into China, which is expected to be the source of less than 2 per cent of total sales in the 2017 financial year.
This does not offer much comfort, however, for investors in Bellamy's.
The fact that Murray River had to come out and say anything to the market at all is a reflection of concern amongst investors about any company reliant on the Chinese market. Bellamy's stock fell more than 40 per cent after infant formula sales plunged. The Tasmanian-based company blamed a stock build-up in China which has hit margins.
Bellamy's has blamed changes to Chinese import regulations which will reduce the number of brands sold in the giant market. This has seen other brands unlikely to get accreditation this year dumping stock. But the fact the company has taken the extraordinary decision to suspend trading in its stock for so long suggests there is only more bad news to come and is another example of how easy it is to get caught out by regulatory changes in China.
Nicholas Simms, the commercial director of infant milk formula at Bubs, says there are risks in any market but is confident it can avoid a repeat of the issues facing Bellamy's, which was caught out by supply issues around manufacturing capacity and ingredients.
Simms says most of Bubs' inventory is sold via cross-border e-commerce platforms such as JD.com, Alibaba, Jessica's Suitcase and NetEase. The company has applied to import directly into China but must wait to clear the registration process, which could take months or as much as a year.
He and the investors backing the company are not deterred by the issues hurting Bellamy's, which slashed the online price of its infant formula and fell out of favour with China's personal shoppers known as "Daigou". Bega Cheese and A2 Milk are also trying to distance themselves from Bellamy's, pointing out they have more secure supply chains.
"The reality is every market has a risk but certain rewards as well. Even though we have a very small business servicing the Chinese market, we believe the opportunity with the e-commerce market place as well as the bricks and mortar retail is a great opportunity," Simms says.
China represented 18 per cent of the company's revenue last year but it is not the only focus. Bubs, which sells its products in Coles and is talking to Woolworths and pharmacy chains, is also going after south-east Asian countries such as Malaysia, the Philippines and Indonesia.
Alibaba made its largest investment outside China last year with a $US1 billion deal to control Lazada Group, which sells products in six markets in south-east Asia. The region is believed to be on the cusp of an online shopping boom as consumers in those countries become increasingly sophisticated in the e-commerce space.
"Australia has had a bit of a love affair with China which is fantastic but that [the Lazada deal] probably shows the importance that region will open up. E-commerce gives brands the ability to access consumers like never before," Simms says.
"China has always been at the sharp end of that but with investments such as that we will certainly see markets like Malaysia, the Philippines and Indonesia starting to be able to be accessed easier and more effectively through such investments."
Bubs was co-founded by managing director Kristy Carr in 2005. Carr had been living in Asia for 10 years working on brand communication and was pregnant with her first child when she first moved back to Australia. "I realised there was quite a big gap in the marketplace for a premium and organic baby food range."
Carr says she is not worried about the difficulties facing Bellamy's. One of Bubs' key products is goat infant milk formula, which is the fastest-growing segment of the market in China. Like any deal with China, relationships will also be the key.
"Albert Tse did a fantastic job working with key parties and bringing a bit of a vision together. Relationships are everything and the relationships we have and we can build in the Chinese market is something that can differentiate us versus other businesses with similar aspirations."
The risks in China remain high, however. Companies that get ahead of themselves can be tripped up easily. Bubs will be wise to tread carefully and not lose sight of the domestic market.
Carr understands that branding and reputation is everything in China, which switched to imports in 2008 when hundreds of thousands of babies become ill from contaminated milk. But companies like Bubs have a lot of competition. Brands from New Zealand and Europe are also popular in China.
