China has emerged as a hotspot for baby formula export from Australia and New Zealand. Imported baby formula holds a significant 56% share of the total market, making it one of the leading export commodities from both countries. These imported formulas will be valued at an estimated US$32 billion by 2023, according to Euromonitor, driven by concerns among many Chinese parents about the quality and safety of domestic baby formula after a series of product safety scandals, while only about a quarter of Chinese mothers breastfeed. 

The trend has greatly paved the way for foreign companies to establish a strong presence and capture significant market share, including New-Zealand milk manufacturer Synlait (ASX: SM1). Synlait along with distribution partner The a2 Milk Company (ASX: A2M) has successfully obtained re-registration permit from the State Administration for Market Regulation (SAMR)*, for a2 Milk’s Chinese-labelled 至初® Infant Formula (stages one, two and three) formulated in line with China’s new GuoBiao (GB)** standards. 

As the manufacturer of the infant formula products, the SAMR registration is held by Synlait and attached to its Dunsandel facility and will allow Synlait to manufacture and export the products for the China market until September 2027. a2 Milk owns roughly 20% of Synlait.

According to Synlait CEO Grant Watson, the re-registration is pivotal for the ongoing success of the manufacturing and supply agreement that Synlait and a2 Milk have, especially a2 Milk being a key long time partner and Synlait strives to continue supporting its China growth ambition. 

“We are thrilled to have achieved this significant milestone, which is pivotal to the long-term success of our Advanced Nutrition business,” said Watson.

“Our shareholders, staff, customers, and farmer suppliers all benefit from the certainty of today’s re-registration and continued China market access.” 

In a complementary separate announcement by the a2 Milk, it is noted that New Zealand’s Ministry for Primary Industries (MPI) had cooperation arrangements in place with Chinese regulators which positioned New Zealand well in relation to China’s registration processes.

Next step after the SAMR approval would be to commence production later this month with product transitioning in the market during H1 FY24. 

Following the news, Synlait’s stock price rose by 13.95% to $1.68 per share as of 12.30pm on 6 June, compared to 5 June closing price at $1.48 per share.

In the first half of FY23, Synlait reported revenue was down 3% ($20.8m) to $769.8 million driven by the 48% decrease of ingredients sales volumes due to product release delays and higher FY 21 carry-over inventory in H1 FY22. However, the Company remains optimistic that the 26% increase in Advanced Nutrition sales volumes (inclusive of sales of baby formula to a2 Milk) would be able to offset this. The Company reported adjusted NPAT of $8.9m (down $6.8m on previous corresponding period), operating cashflow of $124.7m (down $241.9m on pcp), and $518.6m net debt (32% increase on pcp).

On 31 May 2023, Synlait updated its FY23 net profit after tax (NPAT) guidance range to a net loss of ($5) million to a net profit of $5 million, attributable to its Advanced Nutrition division which is expected to deliver an NPAT impact of approximately $16.5m in FY23 from consumer-packaged infant formula volumes and base powder production. The remainder of the NPAT impact, amounting to approximately $3.5m, is attributable to less material factors, including higher financing and supply chain costs.

The demand for imported baby formula in the Chinese market goes beyond being highly sought-after; it reflects a massive market potential. The recent SAMR re-registration approval is expected to propel Synlait towards the upper end of its net profit guidance range. Chinese parents favour imported brands known for their rigorous quality control measures. The consumption of imported baby formula products was previously limited to residents in big cities. However, with the rising middle class in China and the subsequent increase in disposable income, even parents in smaller cities and regions can now afford higher-priced imported formula options. Additionally, some parents believe that foreign brands offer superior nutritional benefits for their babies.

*  SAMR is a Chinese authority directly under the State Council of the People’s Republic of China that deals with market competition, monopolies, intellectual property and patents, as well as drug safety)

** In China, all domestic and imported products or services must be complied with GB standards, and are required to be tested in order to ensure their compliance with GB standards. Failure to comply with GB standards will result in rejection of products during the import process and products being seized from stores, resulting in a significant impact on retailers and manufacturers in terms of reputation and cost.