a2 Milk strikes a distribution deal with Chinese partner and sets sights on $2bn annual revenue

While  the  big  co-op Fonterra  is  the  dominant force  in the  NZ  dairy  industry,  injecting nearly $14bn into regional  economies  through its payout  to  farmers, some  of  the  smaller  companies  have  become  spectacular performers.

Point of  Order  last week   drew  attention  to  how  the  specialist  Waikato processing company Tatua had  outstripped  Fonterra  with  its  2021-22 payout.

This  week a2 Milk  grabbed  a  headline  by  telling the   market it  had renewed exclusive import and distribution arrangements with a Chinese company for five years. This  triggered   fresh interest in  the  company,  which  is  sitting  on  a cash  pile  of $816.5m  It  plans  to  spend $150m of this in a  share buy-back

China State Farm Agribusiness has been a2 Milk’s strategic distribution partner in China since 2013 and is the exclusive import agent for its China label products, including a2’s China label infant milk formula.

CSFA is a wholly owned unit of China National Agriculture Development Group Co (CNADC), which is also the parent company of China Animal Husbandry Group (CAHG), which holds a 25% stake in Mataura Valley Milk, which  operates  a  specialist  processing plant  in Gore, Southland.

a2 Milk owns the rest of Mataura Valley.

“The extension of arrangements with China State Farm confirms the strength of our relationship with key partners in China and our shared confidence in the future,” a2’s CEO David Bortolussi said.

Bortolussi said China State Farm’s support would be critical for joint success in China.

In August, a2 Milk reported a 42% jump in annual net profit to $114.7m, driven by strong growth in its infant formula business.

Revenue in the June year grew 19.8% to $1.44bn.  A2 Milk said it was on the way to reaching revenue of $2bn in five years’ time.

The company said last week the weaker NZ dollar made for a positive start to the current financial year, with first quarter sales expected to be marginally ahead of plan.

A2 said it faced a positive outlook for 2023 with high single-digit revenue growth and ebitda margin improvement expected. This  follows what Bortolussi described as a “successful year”, with the company returning to double-digit growth in revenue and earnings despite significant headwinds.

“We are pleased with the progress that has been made in stabilising the business, refreshing our strategy and improving our execution,” he said in  August.

China-label and English-label infant formula sales were up 12.2% and 11.6%, respectively.

Australia-New Zealand, and US liquid milk sales were up 1.8% and 30.2%, respectively.

”Our significant increase in marketing investment has driven further gains in brand health metrics and record market shares delivering strong growth in our China infant milk formula business,” Bortolussi said.

The company remained committed to the unofficial daigou channel and had increased its direct engagement and marketing support, he added.

Analysts  said at  the  time a2 Milk had shown strong “execution” of its strategy in a difficult macro- environment.

It  underlines  how  a2 Milk has  progressed   from  its  origin  in Dunedin nearly  20 years  ago  to be  a dynamic  element  in  NZ’s  dairy industry, marketing  its  milk  product,  which  it  claims delivers  health benefits.  

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