The Bubs Australia Ltd (ASX: BUB) share price went up 5% after it announced a deal to maintain and grow its presence in the Chinese market.
Bubs is a growing infant formula business which specialises in goat milk products.
Bubs’ Chinese deal
Bubs has entered into binding agreements with Heilongjiang Ubeite Dairy Group Co Ltd (HUG) to secure an existing State Administration for Market Supervision (SAMR) approved goat infant formula brand slot and manufacture a new “ultra-premium” range of Bubs Chinese label formula products in China.
The application to renew the existing registration under Bubs’ brand with SAMR is now in progress and, if approved, the product launch is likely to commence in the second half of FY23.
Bubs said that the new “ultra-premium” Bubs Chinese label goat infant formula product range has been developed exclusively for Chinese infants, based on A2 goat milk protein and includes premium ingredients.
The Bubs China goat infant formula products have been formulated in accordance with its new standards. Once approved by SAMR, this will give Bubs access to the remaining 80% of China’s $40 billion infant formula market for the first time, while differentiating from Bubs’ English label products. This could be a boost for the Bubs share price.
In addition to the goat SAMR approved brand slot, HUG has granted Bubs a first right of refusal to secure a SAMR registered “ultra-premium” A2 protein cow milk slot for Bubs Supreme A2 protein brand. This is subject to Bubs meeting minimum volume commitments and targets for goat formula in year one.
A new Chinese company will be created for the purpose of operating a marketing and distribution joint venture, owned 75% of Bubs Australia and 25% by Zhitong.
Management comments
The Bubs Executive Chairman Dennis Lin said:
We have been closely observing China’s evolving infant formula market dynamics and the recent acquisitions of China’s infant formula manufacturing facilities by multiple multinational corporations operating in our sector. It is clear to us that China’s supply chain is coming of age, and this is being reflected in a segment of Chinese consumers gravitating towards a ‘China pride’ sentiment when choosing Chinese-made products.
He also pointed to the recent success that Bubs has experienced in the US by receiving FDA regulatory approval. This “really does put Bubs on the global map”.
Final thoughts on the Bubs share price
This is an interesting move by Bubs to try to capture more of the Chinese market. Shareholders will just have to hope that management have chosen the right structure and Chinese partners to be successful.
Bubs revenue has been rising, yet the Bubs share price is down 17% in the last month. I think it could be a high-risk, long-term opportunity. But, it will need to be successful at capturing meaningful market share in at least one of the USA or Chinese markets.
