China’s falling birth rate and sluggish economic recovery are expected to cause a double-digit decline in the country’s infant formula market this financial year, a2 Milk Co. said Monday.
Still, the company expects to clinch a bigger share of the shrinking infant milk formula market, which comprises almost 70% of the company’s sales, in 2024, it said in its full-year earnings statement. A2 Milk shares fell as much as 12.3% in Wellington, the most in since May 2021, to the lowest in more than a year.
The China market is “challenging” for now but is expected to steady in the longer term, Chief Executive Officer David Bortolussi said in an interview.
“Even if it [the Chinese market] does decline more in the future, then it will eventually stabilize,” he said. “It’s not going to continue to decline at the rates that it is at the moment. We still have an enormous market opportunity for us and share gain opportunity.”
The number of babies born in China fell 10% to 9.6 million in 2022 from the year before, and is expected to fall further this year due to the lagged impact of Covid-19, challenging macroeconomic conditions, and youth unemployment rates, a2 said. Competition is also increasing in the Chinese market, it added.
A2’s overall revenue in Asia grew 38%, as the value of China’s overall formula market declined around 14%, it said.
China has endured a sluggish economic recovery following the end of the nation’s Covid Zero policy late last year and Chinese parents are increasingly favoring local baby formula brands, Bloomberg Intelligence said prior to the earnings, adding to headwinds for companies such as a2.
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The company, which gets about 63% of its revenue from China and other parts of Asia, reported earnings before interest and taxes of NZ$219.3 million ($129.9 million), meeting analysts’ estimates. Net income also met forecasts, rising 26% to NZ$144.8 million.
The company delivered a “solid operating result and appropriately caveated outlook statement,” Jarden analysts Nick Yeo and Adrian Allbon said in a research note. However, the downgrade for low single-digit revenue growth is likely to continue weighing on investor confidence, they said.
China granted a2 regulatory approval this year to keep selling its baby formula in the country until September 2027. The company’s products are sourced from cows that produce only the A2 type of beta-casein protein, which a2 says makes its products easier on digestion.
China’s infant formula milk market could shrink by almost a third by 2025 if the country’s birth rate continues falling at its current rate, according to a Bloomberg Intelligence report earlier this year. In 2022, the nation’s population started shrinking for the first time in six decades.
--With assistance from Georgina McKay.
(Updates with share price in second paragraph, chart, analysts’ estimates in eighth paragraph)