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Why Keytone Dairy Has Been So Volatile Over The Past Year?

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

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.

Keytone-Dairy-Corporation

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.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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