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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

The a2 Milk Company Proprietary Channel Checking in China

OUTPERFORM
We recently conducted the second iteration of our proprietary&nbsp;consumer survey (with 101 responses) to gain further insights into consumer sentiment, current behaviour and views from end customers on the ground in China. Our findings provide confidence that The a2 Milk Company's (ATM) brand and associated attributes (particularly NZ sourced) are ranking well with Chinese consumers. It also reinforced the runway of opportunity still available.&nbsp;The last 12 months have been challenging for ATM, with the magnitude (and pace of change) of recent earnings pressure surprising us and materially denting market confidence.&nbsp;This is amplified by opaque channels to market and high reliance on one market (China), with very limited visibility (including for management). The path forward is unlikely to be smooth and it will take time to rebuild market&nbsp;confidence. That aside, our channel checks most importantly continue to reinforce positive brand health metrics and end consumer demand.&nbsp;


Three key takeaways from our proprietary consumer survey



Strong perception and ranking for ATM:&nbsp;a2 ranked brand #4 in our survey on brand choice (it was brand #5 amongst our respondents in October 2020), supported by a #3 rank for quality perception. There was no material change in perception of a2 in recent months across our survey respondents.&nbsp;China is a large market and all our recent channel checks continue to reinforce material runway still available to build brand awareness (a2 awareness of 41% in our survey). While advertising is not seen as a key driver of purchase, a2 advertising awareness was also low.
Consumer view that the&nbsp;daigou&nbsp;channel will recover, but unlikely to pre-COVID levels.&nbsp;Only one respondent was of the view the channel never recovers.&nbsp;This, and other recent channel checks,&nbsp;broadly aligns with our view and ATM forecasts — we assume a gradual recovery in the&nbsp;daigou&nbsp;channel (as pricing/inventory normalises,&nbsp;freight rates ease and&nbsp;borders eventually re-open), albeit to 70% of pre-COVID levels by FY24E.
Foreign, particularly New&nbsp;Zealand, ranking well.&nbsp;New&nbsp;Zealand&nbsp;remains the highest ranked country with respect to quality perception (by a wide margin) for Infant Formula (IF).&nbsp;Foreign brand preference was material, led by high quality/safety perception. While the majority of consumers once again signalled no change in foreign brand confidence, 20% did signal a change, with the majority of these respondents attributing it to COVID-19 (67%, or 6% of total respondents).​​​​​​​​​​​​​​



Other notable points of interest



Of active IF consumers, 15%&nbsp;in our survey regularly use&nbsp;daigou&nbsp;(still), while another 19% have changed away from&nbsp;daigou&nbsp;for a range of reasons. Online channels are the most common replacement.
Category proving resilient; 85% of respondents said they would not change their IF brand of choice if their income declined.
Main resistance to buying a2 was price (~19% of respondents).
Purchase drivers and behaviours were largely as expected, and stable relative to our last survey.&nbsp;IF purchases are primarily influenced by recommendations; with brand, reputation and formula the key attributes prioritised.




Chelsea Leadbetter CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262





Matt Montgomerie
matt.montgomerie@forsythbarr.co.nz
+64 9 368 0124



The A2 Milk Company: Proprietary Channel Checking in China

A2 Milk Co Ltd

The A2 Milk Company: Proprietary Channel Checking in China