Risks of China Business | A2 Milk

28 July 2021

Global markets were mixed overnight, (S&P 500 index +0.2%) with US markets eking out another gain. The S&P 500 index is hovering around a record high with investors weighing the outlook for growth at the start of a busy week of earnings and policy updates

Energy and materials were the best performing sectors as well as big tech giants Apple, Alphabet and Microsoft which are all set to report on Tuesday, with Google, Facebook, and Amazon also set to report later in the week.

Tesla rose +2.2% after hours, being the first to report amongst the big tech names on Monday. Tesla also announced it would start accepting bitcoin for vehicle purchases again. Amazon confirmed it is looking to add digital currency and blockchain experts to its payments team, suggesting it could be taking a look at accepting bitcoin and other major crypto currencies which saw Bitcoin rally, to back above US$40,000 (the first time in six weeks) – recovering from its recent plunge to below US$30,000 a week ago.

The Hong Kong Market (Hang Seng Index -4.1%) fell yesterday, wiping out all of its 2021 gains, as Chinese tech giant Tencent slipped 7.7%. 

The selloff came after Chinese regulators ordered Tencent to give up its exclusive music listening rights. This followed on from Private education firms listed in Hong Kong tumbling as Chinese authorises stepped up restrictions on the sector.
New regulations ban companies who teach school curriculums from making profits, raising capital, going public or engaging in M&A, among other restrictions. While there are limited direct implications for Aussie & NZ stocks, the move highlights the risk of doing business in China, and how quickly (and comprehensively) policies can change. The flow on effect globally saw most businesses dealing with China trade weaker on concerns over potential policy risks in their respective areas.

Given the news, it was not a surprise that that A2 Milk came under pressure yesterday. 

A2 Milk (:NZX / A2M:ASX)

A2 Milk shares fell -6.4% yesterday, amidst China’s regulatory crackdown. Adding to the weakness, export data showed weak monthly infant formula shipments from Lyttleton and Auckland Seaport. Infant formula exports were down -62% in June versus the same corresponding period last year, and second quarter sales down -11% from the same quarter last year. Recent updates suggests sales are expected to be weaker this year, coming at no significant surprise.

We remain HOLD rated on A2 Milk as the challenging dynamics driving their recent downgrades are likely to persist over the near-term and believe there is still a large amount of uncertainty. We would consider reinstating a BUY recommendation when we see signs of positive news first.


Australia & New Zealand Market Movers

The Australian market (ASX 200 index -0.1%) ended yesterday flat as investors shrugged off the effects of a possible extension of Sydney lockdown.

The Materials sector was the best performer mining heavy weights BHP, Rio Tinto Fortescue and Mineral resources all trading strongly as elevated iron ore prices have investors anticipating healthy dividends.
Rare Earth Miner Lynas jumped +10.6%, after reporting a solid quarterly result revenue jumped +69% from the previous quarter on the back o increased production volumes and strong rare earth mineral pricing.

Crown Resorts was down -5.2% due to pressure of ongoing lockdowns and Star Entertainment’s move to withdraw its merger proposal last week.

Retail property landlord and shopping centre operator GPT pulled back its funds from operations and distribution guidance for 2021, citing the pandemic and associated lockdowns in Sydney and Melbourne.

The New Zealand market (NZX 50 index -0.6%) with A2 milk leading losses.
Travel stocks continued to weaken as COVID cases in Sydney continue to spike, rising fears of an extended lockdown saw Air NZ fall -1.3%, Auckland Airport down -1.4% and Sky City Entertainment drop -2.5%.

3 Things Markets will be Watching this Week

  1. Key events this week include huge week for earnings in the US with 180 members of the S&P 500 index  scheduled to provide quarterly updates including Tesla, Apple, Microsoft, Alphabet, Amazon, PayPal and Caterpillar.
  2. The latest US Federal Reserve decision Wednesday. Economic data; CPI (inflation) prints in the Eurozone and Australia, 2nd quarter economic growth (GDP) data in the US and Eurozone.
  3. Locally, earnings season kicks off with Rio Tinto’s 1st half result along with a host of quarterly production reports and AGM’s to be held including Macquarie Group, Mainfreight and Ryman Healthcare.
Global markets were mixed overnight, (S&P 500 index +0.2%) with US markets eking out another gain.

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