The Bubs Australia Ltd (ASX: BUB) share price is up around 5% after the company announced a manufacturing agreement.
Bubs’ manufacturing announcement
Infant formula business Bubs announced that it has entered into a memorandum of understanding (MoU) with joint venture partner Beingmate.
The deal is to manufacture Bubs China label goat infant formula locally in China, made from 100% Bubs Australian goat milk at one of Beingmate’s registered facilities.
Bubs intends to acquire an ownership interest in the facility in Beihai China and secure exclusive use of a SAMR (State Administration for Market Regulation) approved brand slot.
For a bit of background information, Beingmate owns five CNCA certified (Certification and Accreditation Administration of the People’s Republic of China) manufacturing facilities and has the largest infant formula portfolio in China.
Bubs tried to reassure investors – it will retain full ownership of brand intellectual property and the proprietary Bubs China formulations, specifically formulated for Chinese babies which targets lower-tier cities.
Why did Bubs make this move?
Management believe that it will secure a faster, more certain route-to-market and full access to China’s general trade channel, including Beingmate’s existing distribution network across 30,000 mother and baby stores.
Bubs pointed out that since April 19, 92 product applications have been successful in obtaining SAMR registration – of these, 77 are manufactured in China. Of the other 15 approved outside of China, 9 are Chinese owned brands manufactured in France. The only brand to achieve certification during this period was Wyeth for six products manufactured in Singapore.
Beingmate has 51 infant formula products under 17 brands that are registered by SAMR and being sold nationwide.
Bubs intends to withdraw the existing SAMR brand applications previously made by Deloraine. However, Bubs is continuing to progress SAMR registration for an Australian made ‘super premium’ product to be produced at its Deloraine facility and will resubmit the differentiated formulations, which will be aimed at tier-one cities.
There will be no change to the English label product currently produced at Deloraine and sold directly into China via the cross-border eCommerce channel.
The company intends to replicate the ‘created by Bubs’ localisation strategy in other jurisdictions to accelerate global expansion in sizeable markets with similar regulatory requirements.
Management comments
Bubs Founder and CEO Kristy Carr said: “Given the current geo-political landscape and regulatory risks, this breakthrough localisation strategy for a ‘created by Bubs’ product to be packed in China exclusively from our own Australian premium goat milk mitigates key risks and provides a secure pathway to gaining full access to the world’s largest and fastest growing infant formula market.”
Summary
My own take on this is that I think it’s a clever move. There are clear China risks when it comes to infant formula – just look at what happened to Bellamy’s.
This way of doing things could be the best way for Bubs to get access to the Chinese market whilst maintaining as much control as it can for the rest of the business. I’d be happy to buy shares of Bubs today, along with other ASX growth shares that I’ve written positively about.
