A2 Milk Still Attractive Despite Near-Term Headwinds and More Muted China Outlook

A2 Milk's latest downgrade indicates our prior expectation--for the firm's share of the Chinese infant formula market to continue its rapid ascent--was too optimistic, particularly in English-label. Persistently high inventory through the sales channel has stifled reordering from key corporate daigou partners, weighed on market pricing, and led to ageing of available product. While we continue to expect continued growth in Chinese-label baby formula and some recovery in the daigou channel, we now anticipate market share growth will prove more gradual as continued expansion of Chinese-label products begin to cannibalise English-label daigou sales and domestic Chinese players increase traction. We lower our fair value estimate for a2 Milk by 34% to NZD 10 per share.