The share price of the A2 Milk Company Ltd [ASX:A2M] has fallen sharply to begin the week as the strain in Australia and China’s relationship continues.
A2M shares managed to dodge much of the volatility that has plagued the ASX since the pandemic struck.
However, as the fallout from coronavirus continues — particularly the China–Australia relationship — the share price has begun to splutter.
At time of writing, the A2M share price is down $1.68 or 9.79% to trade at $15.48 per share.
A2 Milk losing controversial sales channel
In an announcement made this morning, A2M updated investors on the impacts COVID-19 have had and are likely to have in FY21.
But the elephant in the room was the deteriorating state of Australia’s relationship with China.
A2M said that they began to see disruptions to the corporate daigou channel (a name given to a Chinese reseller), particularly due to the Stage 4 lockdown in Victoria.
To compound the issue further, sales to retail daigous have been lacking due to reduced tourism from China and international student numbers.
Consequently, A2M said it is now witnessing a contraction in the daigou channel beyond their previous expectations.
And the replenishment orders that would typically be anticipated have not been received.
Though the diagou channel isn’t a typical form of trade in Australia, it does represent a significant part of A2M’s sales in their Australia and New Zealand business.
A2M anticipates the factors currently impacting this sales channel to continue for the remainder of the first half of FY21.
Meaning the company is expecting revenue to be materially lower for the first half, compared to the previous corresponding period.
Is this a serious problem?
In short, yes, this could be serious for A2M.
Basically, a diagou is someone who buys on behalf of someone else.
A personal shopper if you like.
The practice has previously drawn outrage in Australia as products like baby formula are cleaned out by diagous to send back to China.
Leaving local shoppers without.
Though, Australia is currently thought to generate about $4 billion annually from diagous.
That’s some serious buying power.
Which, for now at least, is drying up.
Fortunately for A2M, diagous represent only one channel through which it sells infant formula.
With performance in all other areas of the business strong, according to A2M.
The local China business is performing strongly, notably in mother and baby stores, and is anticipated to continue.
However, investor concerns are evident today with the big drop in share price.
Want to find out exactly what’s driving the divide between the two countries? It’s got to do with this little known event, which triggered the China–Australia divorce. Get our Editor Greg Canavan’s special report on the topic, and learn about the carefully calibrated investment plan he has to minimise the impact of any potential fallout from the divorce. You can learn more right here.
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