Devon Funds Management China Research Trip March 2018 Prelude ATM - - PowerPoint PPT Presentation

Devon Funds Management China Research Trip

March 2018

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Prelude ATM 1H18 result

128 168 206 233 304 8 30 38 51 114 3 15 12 9 16

• 50

100 150 200 250 300 350

1H16 2H16 1H17 2H17 1H18

a2Milk Sales by Geographic Segment – NZ$m

ANZ China UK & US

A A) Consensus pre-result 1H18 China Sales (c. NZD75mn)

35 50 70 85 116 1 8 14 19 48

• 8
• 12
• 8
• 15
• 8
• 40
• 20

20 40 60 80 100 120 140

1H16 2H16 1H17 2H17 1H18

a2Milk EBITDA by Geographic Segment – NZ$m

ANZ China UK & US

EBITDA Margin (%) 1H16 2H16 1H17 2H17 1H18 ANZ 27% 30% 34% 36% 38% China 14% 27% 37% 37% 42% UK & US

• 281%
• 80%
• 65%
• 161%
• 52%

Source: Devon/Company financials

Infant formula - China research project Focus

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• Investigate retail penetration
• Understand Competitive dynamic
• City tier differentiation (Shanghai vs Xuzhou)
• Pricing
• Brand acceptance

Infant formula - China research project Research methodology

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• 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

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China research trip Research methodology - locations visited

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

DaiGou CBEC Hong Kong eCommerce MBS

¥210 ¥239 ¥239 ¥210 ¥245 ¥235 ¥263 ¥263 ¥238 ¥428 ¥428 ¥398 ¥458 ¥458 ¥398 ¥- ¥100 ¥200 ¥300 ¥400 ¥500 ¥600 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

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China findings Research methodology - a2 Milk pricing dynamics across channels

English Labelled Chinese Labelled Woolworths Pricing (RMB135)

Source: Devon

Online Platforms

China findings Research methodology - Mainland a2Milk infant formula vendor profiles

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Geographic Reach Products Range

Premium Supermarkets

Regional MBS Individual MBS

Source: Devon

China findings Research methodology - a2Milk infant formula buyer profiles

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Buyer HK Buyers Tier 1 City Mothers Tier 2 City Mothers Tier 3 City Mothers DaiGou Chinese Mothers

Preferred Channel

Chained Pharmacies (i.e. Watsons) DaiGou, premium supermarkets, MBS DaiGou, premium supermarket,

• nline, MBS

Premium super market, MBS Local MBS

How did you hear about a2?

Clients’ demand Online forums, word of mouth

Price profile

HKD250 - HKD550 RMB200 – RMB450 RMB200 – RMB450 RMB350 and above RMB250 and below

Understanding of a2 USP

No No No No No

Reason for buying

Clients’ demand It’s from overseas and many others around me use it The most expensive infant formula Tier 1 city mothers buy it, so I want it

Source: Devon

Infant formula - China research project Research methodology

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• 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?

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Source: a2Milk investor presentation

Infant formula - China research project Nestle (incl. Wyeth) - the elephant in the room

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(%) 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

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• 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

This document is not a Product Disclosure Statement (PDS) under New Zealand law or under any other law. It is for information purposes

• nly 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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