Trading Halt, page-264

Dairy brand A2 Milk has entered a trading halt, pending an announcement on revised earnings guidance — a month after the company revealed a collapse of the lucrative Chinese daigou trade.

Despite China accounting for about 80 per cent of A2’s business, the company had maintained its earnings forecast, even when international travel bans stemmed the flow of cashed-up shoppers from the Asian powerhouse.

But the company, one of the ASX’s darlings, is now bracing investors for a revision of its earnings. The market has been expecting negative China news, with A2’s share price falling from a high of $20.05 in July to $13.28 before it entered its trading halt.

Trade with China has already been hit as daigous — or trusted shoppers buying products in Australia and sending back to China — have dried up. But investors fear dairy products will be the next soft commodity China will target in its trade stoush with Australia, which has already led to punitive tariffs or bans on beef, barley, timber, wine and seafood, and now coal, wiping about $20bn of Australia’s Chinese exports.

A2’s chairmanDavid Hearn has weighed into the geopolitical tensions, calling on the Morrison government to repair its relationship with Beijing, saying it had effectively “punched China in the face”.

“It’s regrettable from a political point of view and economic point of view for Australia because the reality is Australia is highly dependent on China as an export market for its products,” Mr Hearn told The Australian last month.

A2 had previously told the market it was expecting a modest increase in full-year revenue — of 4-9 per cent, to $NZ1.9bn ($1.79bn) — versus the 33 per cent leap to $NZ1.73bn last year.

It is expected to announce its revised earnings on Monday morning.

Key supplier, New Zealand’s Synlait Milk, which manufactures most of A2’s infant formula it sends to China said it was aware of A2’s announcement and will make its own if necessary.

“The A2 Milk Company has entered into a trading halt having become aware of information which may require it to revise previously issued guidance to the market,” Synlait said in an announcement to the NZX.

“The A2 Milk Company is a strategic customer of Synlait. Once an announcement is released by The a2 Milk Company, Synlait will assess this information, and the impact on its own company, and provide a further update to the market if necessary.”

Mr Hearn has urged the Morrison government to engage in less public grandstanding to repair its relationship with China. He said Australia should engage in more diplomacy to raise its concerns around foreign interference, Hong Kong, Taiwan — and the origins of COVID-19.

“What it (the Morrison government) should be doing is what most of the diplomats in the world have done for some time, which is to have a relationship that is relatively benign and neutral on the surface, and when there are comments they wish to make on particular aspects of their behaviour or actions, they do that behind closed doors where you get a good hearing,” Mr Hearn told The Australian last month.

“You may not get an answer you like, but you’ll get a good hearing. If you do that in public, you won’t get a hearing.”

Mr Hearn told The Australian last month that while COVID-19 enforced international travel bans hit the retail daigous — who are mostly students and tourists buying products from Australian shops and sending them back to China — the company didn’t anticipate the “corporate daigou” trade to also evaporate.

Most the corporate daigous are based in Melbourne and trade was interrupted during the city’s three-month lockdown. Now restrictions have been eased, Mr Hearn said there had been “flickers of life” but the trade is “nowhere near” pre-pandemic levels.

“I am encouraged by that as soon as it (Melbourne) opened up, we did see some in-store pick up in business. When I say that, I don’t want to be misunderstood — it is not anywhere near back to where it was but there was a flicker to life.

“That gives me encouragement that the latent business demand and the latent business model is still intact and it will come back. The big question, and therefore what the forecast looks like for where we’ll be this year, is all dependent in large part on how fast that will return.

“I don’t know the answer to that yet. We have taken a middle road caution between an optimistic V-shape recovery and pessimistic U-shape recovery.”

JARED LYNCH

REPORTER