Synlait Milk, a2 shares at record high as CFDA registration underpins China strategy

Shares of milk processor Synlait Milk and its infant formula partner a2 Milk rose to record highs today on confirmation that their brands and recipes have gained registration in China, removing an obstacle in a market with soaring sales.

Synlait rose 7.3 percent to $6.29 on the NZX and has gained 88 percent this year. A2 rose 4.1 percent to $6.80 and has surged 207 percent in 2017, the best performer on the NZX 50 Index, followed by Synlait.

Synlait said today it had gained manufacturer registration for a2 Milk's Chinese label infant formula, meaning the products will continue to have market access in 2018 when China tightens its rules. From Jan. 1, 2018, all manufacturers of infant formula are required to register brands and recipes with the China Food and Drug Administration (CFDA) to sell into the Chinese market through traditional channels. The registration is part of broader efforts by China to lift food safety standards after a number of scares including the death of infants from ingesting infant formula laced with melamine in 2008.

In the 12 months ended June 30, a2's sales from China and other Asian markets jumped to $88.9 million from $38.2 million, while earnings before interest, tax, depreciation and amortisation in those markets rose 255 percent to $32.7 million. Its overall revenue gained 56 percent while profit tripled to $90.6 million. Synlait's July year profit rose 11 percent to $38 million as sales rose 39 percent to $759 million and the company predicted "a strong increase in profit" this year.

"CFDA registration is a major step in getting a license to operate through formal China label channels and helps de-risk the future beyond 1 Jan 2018," said Oyvinn Rimer, a director and research analyst at Harbour Asset Management. "Because it is China regulation and the outcome is binary, the market will appreciate that this is no longer an overhanging uncertainty."

Rimer said the announcement on registration "is a testament to a good process at Synlait (who has run the registration process), who have invested heavily in a world-class manufacturing asset and to understand the China regulatory landscape."

Fonterra Cooperative Group has also gained registration with its partner Beingmate Baby & Child Food for 15 recipes, it said this week, adding that the impact of the Chinese registration system would be to reduce the number of brands jostling in the Chinese market to hundreds from thousands currently, creating opportunities for those that remain.

"We view this registration as another milestone in our long-term partnership with a2 Milk," said Synlait chief executive John Penno said in a statement. "Having successfully navigated the process, in conjunction with a2 Milk, we are now in a stronger position for future applications of other Synlait customers," he said.

Synlait and a2 began their partnership in 2010, with Synlait manufacturing the infant formula made from milk containing only the A2 beta-casein protein type rather than the more prevalent A1 protein type. The a2 Milk Company worked closely with Synlait and their Canterbury milk suppliers to introduce and manage A1 protein-free herds, while simultaneously building a manufacturing process capable of exclusively streaming that milk into finished infant formula.

"We look forward to the continued expansion of our business in China following this announcement," said a2 managing director Geoffrey Babidge.

A2 owns 8.2 percent of Synlait, which in turn owns 25 percent of Sichuan-based New Hope Nutritionals, another applicant for CFDA registration.

(BusinessDesk)