A2 Milk Earnings: Troubled Near-Term Outlook Overshadows Improving Fundamentals

The precipitous slide in a2 Milk ATM shares following the release of fiscal 2023 earnings belies the company’s solid and improving position in Chinese infant formula. We think the market is preoccupied by the troubled near-term outlook. The new registration process is proving highly disruptive, and births remain below trend. Fiscal 2023 EBITDA rose 12% to NZD 219 million, about 6% below our forecast. While we make some reductions to our near-term earnings estimates, our long-term thesis for a2 Milk is intact. We expect a2 Milk to continue to capture share in a declining market as increasing premiumisation partially offsets falling births in China. Reductions to our near-term forecasts are broadly offset by time value of money, and we make no changes to our NZD 8/AUD 7.20 fair value estimate.

Despite the challenged backdrop, a2 continues to gain share. Mother and baby store value share now sits at 3.4% (from 3.0% in fiscal 2022), per Nielsen data, and Chinese domestic online share at 3.3% (from 2.5% in fiscal 2022), per Smart Path China data. The English-label business is also recovering, with cross-border e-commerce share lifting to 23% from 19% in fiscal 2022, per Smart Path China. Daigou and online-to-offline share rose to 21% from 20% in fiscal 2022, per Kantar Worldpanel.

We forecast a2 expanding its Chinese infant formula share (combined across both Chinese and English labels) to about 8% by fiscal 2028 from about 5% currently. We expect this to stem from some recovery in the English-label reseller channels and continued growth in Chinese-label share. We expect the Chinese-label business will prove key, more durably driving market share growth without the same reliance on English-label resellers. A2′s marketing and distribution investment, which has shifted to focus on the Chinese-label business, appears to be reaping rewards with brand awareness and loyalty improving across the board, supporting future market share growth and a2′s narrow economic moat.