EXPERT GUIDE: What to look out for when investing in infant formula stocks

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The China-driven market for ASX-listed infant formula exporters is becoming a crowded space — but XEC Partners director Gennadi Koutchin says there’s still room for growth.

Bellamy’s (ASX:BAL) kicked off an ASX boom in infant forumula back in 2016 – why is it such a long-lasting trend?

The key thing is that the urban population is growing — especially in China or more broadly Asia.

More people are moving to the urban areas, working more and there is an increased reliance on some of these convenience products.

Add to that the growth rate of the economy and the population quite simply has more money to spend.

The growth has come from emerging countries and I think there is still room for it to grow further.

Interestingly, per capita consumption of dairy products in China remains low at about one-third of global average.

In addition, removal of China’s one-child policy and growth in the middle-class population are set to continue driving demand for quality dairy products.

The Chinese government has cracked down on quality control, how will that affect potential new entrants in the market?

China’s dairy market accounts for about a third of the global market, so any changes in their market significantly change the global landscape.

The market for milk formula products is still growing, although for new entrants it’s becoming more difficult to join.

Regulations that are coming in are going to take care of some of the issues of safety and improve the quality of infant milk powder products that are available.

It is now expected the number of products available in that market would shrink from thousands to a few hundred as a result.

There will be a lower number of players that are in the market. Not all will be able to produce to the same level of quality control and/or progress through the rigorous registration process established in China for imported dairy products.

Why are Australian products so popular?

The product coming from Australia and from New Zealand is considered high quality and clean. Lower tariffs resulting from free trade agreements further facilitate trade with China.

Images of wide green pastures are often used to represent Australian products. Cleaner environment means cleaner feedstock and that is attractive.

Add to that, our proximity to the market makes a compelling supplement to domestic producers.

What should investors look out for when researching infant formula juniors?

First and foremost it is all about having that Chinese import certification.

Further to that, the key is for companies to have strong relationships on the ground in the countries where they operate — with distribution partners and people that are going to market the products locally.

After you’ve passed certification stage, it is about being able to market each product effectively.

Increasingly, companies are using social media to get products recognised but that really depends on being able to relate to consumers in each jurisdiction.

As well as that, it helps if the product is differentiated in some way – we have seen Bubs (ASX:BUB) offer a goat milk alternative or Bioxyne (ASX:BXN) market milk formula as a product for the whole family.

And there’s a new New Zealand based manufacturer set to join the mix, Keytone Dairy Corporation.

The company already holds a pre-requisite licence to import its products into China and is raising growth capital to expand its manufacturing capacity, increase range of its value added proprietary products to drive growth as well as broaden distribution channels for its current and new products.

Ultimately, we believe companies with a competitive product mix, asset base to support it and strong partnerships in place will benefit most.

Disclosure: XEC Partners and its associates may hold securities in the companies mentioned herein and advise that they may earn fees and other benefits or advantages, either directly or indirectly from companies mentioned in this article.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

This article first appeared at Stockhead, Australia’s leading news source for emerging ASX-listed companies. Read the original here. Follow Stockhead on Facebook or Twitter.

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