Keytone Dairy (ASX: KTD) is an ASX listed company that sells a broad range of dairy products in the Chinese market. They have manufacturing contracts with Bellamy’s, Freedom Foods and Aldi, and are very leveraged to growth in the Chinese middle class. The company made $2.51m in revenue, 23.9% above their revenue the previous year, and posted a loss of $3.29m. To address the loss, management is upgrading their production facilities to develop the economies of scale required to be profitable.
While their exposure to China has helped power the company’s growth story, it has proven to be a double-edged sword. China has been increasing the pressure of foreign dairy producers, particularly those involved in infant formula. The daigou channel has been hit in recent times, with China now requiring people operating daigou businesses to acquire licences to operate daigou businesses in both China and the other country the operate in, meaning those companies are subject to the same taxation as normal businesses. This has hurt Australian businesses reliant on the daigou channel, since it increases the average effective rate of tax consumers in China pay on their goods, pricing some consumers out of the market.
This has resulted in particularly bad effects for milk companies such as A2 Milk (ASX: A2M), Bellamy’s (ASX: BAL), Bubs Australia (ASX: BUB) and Blackmores (ASX: BKL). A2 Milk (ASX: A2M) sold off earlier this year, as China ratcheted up regulations on the importation and advertising of foreign infant formula. Companies like Keytone can no longer advertise infant formula in the 0-12-month-old market segment, and China is set to favour domestic producers which it wants to obtain a 60% market share. This has increased share price volatility, as investors question why they should keep funding the losses of a company operating in an uncertain regulatory environment.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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