Some thoughts on 1H21

• China Label / MBS

The most positive observation is the prominent growth of China Label IF sales.

• The coverage of MBS store increased from 18.3k (Dec 19) to 24.3k to date. More importantly, the level of market penetration is great as the products have been widely available in MBS in most of lower tier cities in China after a few years expansion.
• The Lyttelton export data indicates there is a huge increase for IF exported to China since new FY, cross proved by a presentation released by A2MC a few days ago saying growth of China label sales in July and August is 77%.

• English Label / CEBC / China Online Sales

Below is the latest customer reviews data from A2's flagship online store owned byJD.com (https://mall.jd.hk/view_page-83949296.html).For the last 108 days period since beginning of this FY, the average dailyreviews increased is 3169, compared to 2506 same period last FY, which is 26%increase. You could argue but my interpretation on this number we should seeflat to slight growth for the China online sales channel since new FY, which ishighly relevant to CEBC English Label sales.

• English Label / ANZ / Daigou
  • As being stated in the last market update, I believe sales from this channel is materially contracted for 1H21. I'm expecting ~30% sales contraction for this single channel of this period. I'm not very sure how long it will take for this channel to fully recover to previous level, if at all, but I'm counting more on channel shift over the time, as I believe boundary close issue will last longer. I also believe this has changed the customer behaviour (Fewer individual daigous promoting the product >>> customers shifting from daigous to online or MBS). It is fortunate for A2MC to have built multiple robust sales channels before the pandemic hits.
  • Since late October, we started to see some positive signs locally in regards to stock moving. There are fewer A2 stocks than other brands sitting on the shelves, the production dates are still quite fresh. Corporate daigous also seem to be doing better than the last few months.

• A few thoughts towards the end of 1H21
  • Other international Giants doing China IF business are also facing with similar tricky situations. Danone (Aptamil's owner), Nestle, Abbott - their latest Q3 financial reports show mediocre performances i.e. slight contraction in IF sales.
  • The most important thing for me is underlying customer demand is still proven to be very strong. However, rather than believing in full recovery of daigou channel, My hope is on the channel shift in the short term. I'm overall quite optimistic from mid term perspective. The growth story should not stop for at least next a couple of years.
  • With continuous strong customer demand and good signs of sales recovery being observed recently, I believe A2MC will achieve higher end of their revenue forecast ($725m - $775m), or even slightly better. We should be able to see a clearer view on AGM day coming in 2 weeks' time.
  • Uncertainty is still with us regarding 1H21 performance, but If higher end is achieved the share price should see A$ ~16 by the end of 2020.

Not financial advice. DYOR.