How Chinese demand helped drive 116% net profit leap

Wednesday, 22 August 2018
Melbourne, Australia
By Bernd Struben

  • Trade war settled by October
  • China’s war of attrition sees Taiwan lose El Salvador

In yesterday’s Port Phillip Insider, I showed you the five year chart for the a2 Milk Company Ltd [ASX:A2M].

Here it is again:

chart image

Source: Google Finance
Click to enlarge

As you can see, the share price took a tumble in May. That’s when the company fell short of analysts’ full year sales expectations.

Despite that tumble, when I wrote to you yesterday, the share price was still up 399.0% since 6 January 2017. That’s just a whisker short of a 5-bagger (five times your investment) in less than 20 months.

So why am I bringing this back to your attention again?

Because the share price leapt at market open today. At time of writing it’s up 6.3% in intraday trading.

That means when I run the same numbers again today, the gain in the share price is 449.5% since 6 January 2017.

Now if you’re wondering how a 6.3% share price increase can lead to a 50.5% leap in gains, it all has to do with your buy in price.

Back on 6 January 2017, A2M was trading for $1.96. It closed yesterday at $10.11. A small percentage increase on a large number can lead to a much larger percentage increase on a smaller number…in this case the share price at the start of 2017.

This highlights the importance of getting into potential growth stocks in their early days.

Leaving the maths behind, what caused the share price to run higher today? A 116% 2018 net profit jump, of course.

From The Australian Financial Review:

The A2 Milk Company is tipping another year of growth after delivering a 116 per cent surge in 2018 full year net profit to $NZ195.7 million ($177.9 million) supported by strong sales in China and Australia and substantial jumps in earnings and cash generation…

Sales of a2 Platinum infant formula again grew substantially in Australia and China, with continued growth in market share…

“The underlying demand for our product is significant,” said Ms Hrdlicka, who pointed to the 10,000 mother and baby stores in China that now carry its product and 6,000 stores in the USA.

“We have built out multiple channels to China. It’s the quality of product and special nature of our product that is pulling it off the shelves.”

In case you skimmed past it, their products are carried in 10,000 mother and baby stores in China. 10,000!

To put that figure into perspective, there are 995 Woolworths stores in Australia, 807 Coles supermarkets, and 970 McDonald’s.

But then, of course, China’s population of 1.4 billion is 56 times larger than Australia’s. While we’re a lot wealthier than our Chinese neighbours, they’re busily working to catch up. And the ranks of the Chinese middle class are swelling.

As you’d expect, along with their greater wealth comes a greater demand for quality products. Particularly when it comes to food and beverages. And as we touched on yesterday, the quality of Chinese grown and manufactured food can be dubious…at best.

That spells good news for the likes of the a2 Milk Company. Now to some extent the ship has already sailed on A2M. Which is not to say the share price might not keep ticking higher. But at a share price of $10.71 it’s going to be a lot trickier delivering another 449.5% gain in under 20 months.

This is why I mentioned the importance of getting into potential growth stocks in their early days above.

Investing in small-cap stocks does come with more risk than investing in the bigger players. But when those small-caps make good, the reward can be a heck of a lot higher as well.

Those big potential gains haven’t been lost on small-cap investing pro, Ryan Dinse. Nor have the massive opportunities presented by China’s growing demand for safe, quality foods.

In fact, it’s the focus of a new report he released just yesterday titled ‘Australian Pink Gold’. Ryan also highlights three small Aussie companies he believes could deliver the same types of gains — or even higher — as A2M has since 2007.

If you haven’t checked out his new report yet, I suggest you set aside a bit of time to give it a full read. I think you’ll be glad you did. You can access the new ‘Australian Pink Gold’ report right here.

More, after the markets…


Overnight the Dow Jones Industrial Average closed up 63.60 points, or 0.25%.

The S&P 500 gained 5.91 points, or 0.21%. In a sign of the continuing bull run in US equities, the index hit a record intraday high before losing a bit of ground in afternoon trading.

In Europe the Euro Stoxx 50 index finished up 17.99 points, or 0.53%. Meanwhile, the FTSE 100 dropped 0.34%, and Germany’s DAX closed up 53.19 points, or 0.43%.

In Asian markets, Japan’s Nikkei 225 is up 116.95 points, or 0.53%. China’s CSI 300 is down 0.49%.

In Australia, the S&P/ASX 200 is down 23.88 points, or 0.38%%.

On the commodities markets, West Texas Intermediate crude oil is US$66.11 per barrel. Brent crude is US$72.81 per barrel.

That puts WTI up 1.6% since last Wednesday. Though it’s still down 11.9% since 29 June. Not that Aussies are seeing those results at the pump.

Yesterday the Australian Competition and Consumer Commission revealed we’re paying the highest price for petrol in four years. Part of that is due to a weaker Aussie dollar, as oil is priced in US dollars. It also takes some time for lower oil prices to work their way through to the petrol bowser. Either way, this is one four-year record we can do without.

Turning to gold, the yellow metal is trading for US$1,195.99 (AU$1,624.99) per troy ounce. Silver is US$14.79 (AU$20.10) per troy ounce.

One bitcoin is worth US$6,784.19. That puts the world’s biggest crypto (by market cap) up 7.6% since this time yesterday.

Naysayers forecasting the imminent popping of the ‘bitcoin bubble’ are likely scratching their heads on this one. But with hyperinflation striking fiat currencies in Venezuela, Argentina and Iran — to name a few — bitcoin should only become more appealing as 2018 unfolds.

(For all your latest investment advice on bitcoin, ether, XRP, litecoin…and the rest…go here.)

The Aussie dollar is worth 73.60 US cents.

Trade war settled by October

Having opened today spruiking the massive growth potential presented by China’s rising middle class, you may be wondering how that relates to news of China’s slowing economy. Or the possible impacts of the simmering trade war.

First, let’s look to the slowing GDP growth:

chart image

Source: National Bureau of Statistics China / Bloomberg
Click to enlarge

While growth has slowed from 7.9% in 2013 to 6.7% in June of this year, that’s hardly falling off a cliff. And as with our maths puzzle above, today’s growth is coming off a larger base as China’s economy continues to get bigger.

But how big of a dent could Donald Trump’s trade spat put into that growth in the year ahead?

To be honest, that’s a tricky one.

Some analysts predict it could be as much as 2% if the trade war blows out. Others think it would be minimal, as little as 0.1–0.2%. And still others think it won’t have any impact at all. They say the Chinese government will instead take on more debt to counter any slowdown in growth.

Here’s the consensus forecast, from Bloomberg:

The ongoing trade conflict will reduce China’s economic growth by 0.2 percentage point this year and 0.3 percentage point in 2019, according to the median estimate of 16 analysts in a Bloomberg survey this month. That’s if the U.S. follows through on its threat to impose additional tariffs on $200 billion of Chinese goods and China retaliates with levies on $60 billion of imports from America.’

So that’s the consensus forecast. But regular readers will know we don’t put too much credence in consensus forecasts. These analysts are working with a lot of unknown variables here. Meaning they’re making a lot of guesses. Educated guesses, to be sure. But guesses nonetheless.

My guess remains that the trade dispute will be largely settled by October.

On the US side, Trump needs China back in his corner to keep up the pressure on Kim Jong-un on the nuclear front. Not to mention that Trump has plenty of other pots on the boil with the legal issues from the Democrats’ political ‘witch hunt’ mounting. I reckon he’ll be eager to announce a positive deal before US voters head to the booths for the 6 November midterm elections.

On the Chinese side, Xi Jinping is coming under increasing pressure from within the Communist Party. Having recently been granted extraordinary new powers, Xi needs to deliver strong growth or face a backlash. And he won’t be keen for the government to take on even more debt to do it. At the end of the day, Xi knows China has more to lose in a protracted trade war than the US.

While I have low expectations for the mid-level US-China trade meeting taking place in Washington this week, I do expect a solution to be reached inside the next two months. One that will allow both Xi and Trump to claim victory.

And one that should only be good news to these three Aussie small-cap stocks looking to rapidly grow their footprint in China.

Finally, since we’ve been going on about China, here’s the latest on China’s Taiwan denial from The Australian Tribune:

‘China’s War of Attrition Sees Taiwan Lose El Salvador’

China’s chequebook diplomacy has scored another victory…or victim, depending on your faith in the Communist Party. China’s efforts to isolate the independent nation of Taiwan — which China still claims as its own — have long included the spectre of military intervention.

More recently, China has turned to buying global influence with billions of dollars in loans and aid to steal Taiwan’s allies away. But only if, like Qantas, these nations toe Beijing’s…’

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another, then The Australian Tribune is for you.

And it’s absolutely free.

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