2 key risk factors from IPO now addressed/mitigated.
Security of Supply –via equity stake in a) Blend and Pack b) equity stake in Organic Dairy Farmers Australia
Brand awareness. – supply and sales agreements with a) Metcash (initial rollout to 700 stores, approx. 3300 nationally) b) Aiyingdao Mum and Baby, China (initially 100 stores with 1000 nationally) c) Tesco Lotus Supermarkets (China).
Chinese Regulatory background – Misconceptions and why WHA is different to Bellamy’s etc.
In 2014 the Chinese Government announced a 3 step change to regulatory standards of the sale of Infant Formula in China. The aim is to tighten quality control and reduce the number of suppliers to assist domestic producers. The intention is to reduce the number of brands from 5000 to 500 by 2018.
Factories producing must have CNCA approval (Certification and Accreditation Admin of China) – this is a quality control.
2018 – Producers must have an equity stake in a CNCA approved manufacturer and that manufacturer is limited to nominating up to 3 brands for CIQ accreditation (the licence need to sell in store in China).
Producers must be attached to a Spray Dryer facility (used to convert liquid to powder).
This change in regulatory landscape explains the rationale behind the purchase buy WHA of minority equity stakes in Blend and Pack as well as ODFA.
There is a common perception that foreign manufacturers and suppliers are at the mercy of a Chinese Government regulator that can cancel a licence on a whim. Since 2014 the CFDA (China Food and Drug Authority) has not cancelled a single non-compliant licence. The rules have been clearly spelt out and those that conform have had no issue. In short follow the rules! Blend and Pack factory has never had a default, was the 1stapproved and is the largest by volume producer of infant formula in Australia. By contrast, Bellamy’s Camperdown plant has had a number of defaults and quality issues previously and has now had their CNCA accreditation suspended. Bellamy’s have never had CIQ approval to sell in store.
Blend and Pack – 1) 1st Australian manufacturer with CNCA approval
2) largest by volume exporter of infant formula
3) never had a quality default by Chinese regulator (as opposed to Camperdown)
4 ) under terms of acquisition nominate WHA infant formula to CFDA regulator for “1st slot” under new Chinese regulations.
OFDA 1) Sources and produces 75% of all fresh organic milk in Australia.
2)JV between WHA, Mason Financial HK and OFDA to build Australia’s 5th Spray Dry facility (convert liquid to powder).
3) WHA to have exclusive supply of the only Organic Australian produced dairy products.
4) The regulatory changes in China have seen corporate acquisition/tie up of 3 of 4 other Spray Dry plants in Australia.
The Horizontal Integration strategy.
Hopefully I have given a basic understanding of the changing regulatory landscape in China and why that explains the importance of the BP and OFDA transactions.
What is equally important to WHA is how it is positioning itself as the only fully Horizontally Integrated supplier of Australian grass fed Dairy Milk products (Infant formula and Powdered milk) that is compliant and able to sell both in store and online in China. (and obviously Aust and ROW).
Other competitors/peers such as a2 and Bellamys do not have control over the supply chain – they are basically middle men - nor do they have the distribution and regulatory footprint that WHA has.
WHA is now well positioned having exclusive supply, manufacturing, conversion and distribution agreements (both AUs and China to date) in place.
Joel Chang/Mason Financial
HK based billionaire Joel Chang is a 9.64% holder of WHA via Genius Link private equity and its subsidiary Brilliant River. Via his listed HK based business Mason Financial, they are investing circa $2m in this equity round as well as providing the bulk of the funds for OFDA and BP. Mason have already established a health and aged care footprint in China with a significant portfolio across IVF clinics, Aged Care, Health Insurance, DNA testing and Baby Retail.
Hopefully you can now see how WHA is looking to fit in with its majority shareholders support…..they do or will in the near term supply Infant formula, Aged care formula, Mothers supplement, Vitamins Baby food. It is 100% Australian supplied and they are the only company fully regulated to sell in store in China.
To give you an example..in April 2017 WHA signed a HOA with Aiyingdao (Chang/Mason Fin Stake) to trial infant formula in 100 stores. This will presumably expand to the full 1000+ stores in time. Aiyingdao sell 40% of all china’s infant formula, are reducing the number of brands they stock from 8 to 4/5 and WHA will be the only Australian brand in store. They sold 38m tins of formula in 2017!!!
Approximate Margins
1 Tin (1Kg) contains around 10l of milk and costs WHA around $11-$11.50. The sell to wholesaler for around $16. So in the context of the above, 4m tins gives around $15m EBITDA on $45m Revenue.
WHA Price at posting:
91.0¢ Sentiment: Buy Disclosure: Held
(20min delay)