Devon Funds Management China Research Trip March 2018
Prelude ATM 1H18 result 2 a2Milk EBITDA by Geographic a2Milk Sales by Geographic Segment – NZ$m Segment – NZ$m 140 350 116 304 120 300 100 85 80 70 250 233 206 60 50 48 200 35 168 40 19 14 20 150 8 128 1 114 0 100 -8 -8 -8 -20 A -12 -15 51 38 -40 50 30 1H16 2H16 1H17 2H17 1H18 16 8 15 12 9 3 ANZ China UK & US - 1H16 2H16 1H17 2H17 1H18 EBITDA Margin (%) ANZ China UK & US 1H16 2H16 1H17 2H17 1H18 ANZ 27% 30% 34% 36% 38% A) Consensus pre-result 1H18 China Sales (c. NZD75mn) China 14% 27% 37% 37% 42% UK & US -281% -80% -65% -161% -52% Source: Devon/Company financials
Infant formula - China research project Focus 3 Investigate retail penetration Understand Competitive dynamic City tier differentiation (Shanghai vs Xuzhou) Pricing Brand acceptance
Infant formula - China research project Research methodology 4 Two analysts to China Shenci Tang (Devon analyst) – store level Visit retail stores Interview staff Observe pricing Interact with WeChat groups Understand buying behaviour Observe store inventory Observe inter-tier city sales dynamic
China research trip Research methodology - locations visited 5 Trip Overview City Tier Stores Visited Hong Kong SAR 21 Shenzhen 1 11 Guangzhou 1 3 Shanghai 1 21 Hangzhou 2 7 Xuzhou 3 8 Total 71 Source: Devon
China findings Research methodology - a2 Milk pricing dynamics across channels 6 English Labelled Chinese Labelled ¥600 ¥500 ¥458 ¥458 ¥428 ¥428 ¥398 ¥398 ¥400 ¥300 ¥263 ¥263 ¥245 ¥239 ¥239 ¥238 ¥235 ¥210 ¥210 ¥200 ¥100 ¥- Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 DaiGou CBEC Hong Kong eCommerce MBS Woolworths Pricing (RMB135) Source: Devon
China findings Research methodology - Mainland a2Milk infant formula vendor profiles 7 Products Range Online Platforms Premium Supermarkets Individual Regional MBS MBS Geographic Reach Source: Devon
China findings Research methodology - a2Milk infant formula buyer profiles 8 Tier 1 City Tier 2 City Buyer HK Buyers Tier 3 City Mothers Mothers Mothers DaiGou Chinese Mothers DaiGou, premium Chained Pharmacies DaiGou, premium Premium super Preferred Channel supermarket, Local MBS (i.e. Watsons) supermarkets, MBS market, MBS online, MBS How did you hear Clients’ demand Online forums, word of mouth about a2? Price profile HKD250 - HKD550 RMB200 – RMB450 RMB200 – RMB450 RMB350 and above RMB250 and below Understanding of No No No No No a2 USP It’s from overseas and many others around The most expensive Tier 1 city mothers Reason for buying Clients’ demand me use it infant formula buy it, so I want it Source: Devon
Infant formula - China research project Research methodology 9 Mark Brown (Devon CIO) – Macro level Understand regulatory environment Producer meetings Nestle Yashili Bellamy Blackmore Online meetings JD.com Amazon China Consumer panel
Infant formula - China research project a2Milk IP? 10 Source: a2Milk investor presentation
Infant formula - China research project Nestle (incl. Wyeth) - the elephant in the room 11 (%) 2015 2016 2017 Wyeth 13.6 14.8 14.3 Nutricia 13.1 11.0 10.6 MJ 9.2 9.6 9.7 Friesland 7.1 7.6 8.1 Abbott 6.9 7.5 6.9 Biostime 5.9 5.8 5.5 Yili 4.9 5.0 5.2 Beingmate 4.9 4.6 4.8 Nestle 3.9 3.8 4.0 Firums 3.5 3.6 3.5 * Source: Nielson Source: Devon
Infant formula - China research project Summary/other observations 12 Consumers have no real understanding of organic or A2 Formula then provenance are the key consumer factors ATM brand well recognised ATM instore merchandising good but is Illuma excellent Sales assistants are key in retail – Illuma 7,000 : ATM 700 Illuma in 40,000 stores vs ATM 7,000 Illuma marketing spend $300m+ vs ATM $35m (next half) Regulation still cloudy – government dept. consolidation Corporate Dàigòu not trusted – perception of fakes
13 This document is not a Product Disclosure Statement (PDS) under New Zealand law or under any other law. It is for information purposes only and contains summarised information. Accordingly, this document neither purports to be exhaustive nor contains all of the information which a prospective investor or the recipient may require to make an investment decision. This document does not contain all of the information which would otherwise be required by New Zealand law or any other law to be disclosed in a PDS or similar disclosure document required under foreign law. Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant. A PDS for the fund/s mentioned in this presentation is available free from Devon Funds Management Limited. Investors should read and understand the PDS for the relevant fund(s) in which they invest and satisfy themselves they understand all the terms and conditions of investment in the fund/s. The information in this document is not intended to be advice. In preparing this document, Devon Funds Management Limited did not take into account the investment objectives, financial situation and particular needs of any particular person. Devon Funds Management Limited recommends that potential investors consult their financial adviser and obtain professional financial advice on their individual requirements before making any investment decisions. Past performance is not indicative of future results. Investments in any of the Devon Funds are subject to investment risk, including possible delays in repayment and loss of income and capital invested. Neither Devon nor any related company of Devon, guarantees any particular rate of return on, or the performance of, the Devon Funds, nor do they guarantee the repayment of capital from the Devon Funds.
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