devon funds management trip...nestle (incl. wyeth) - the elephant in the room 11 (%) 2015 2016 2017...
TRANSCRIPT
Devon Funds Management
China Research TripMarch 2018
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PreludeATM 1H18 result
128
168
206
233
304
830 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$m
ANZ China UK & US
A
A) Consensus pre-result 1H18 China Sales (c. NZD75mn)
35
50
70
85
116
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14 19
48
-8 -12 -8-15
-8
-40
-20
0
20
40
60
80
100
120
140
1H16 2H16 1H17 2H17 1H18
a2Milk EBITDA by Geographic Segment – NZ$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 projectFocus
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Investigate retail penetration Understand Competitive dynamic City tier differentiation (Shanghai vs Xuzhou) Pricing Brand acceptance
Infant formula - China research projectResearch 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 tripResearch methodology - locations visited
Trip OverviewCity Tier Stores VisitedHong Kong SAR 21Shenzhen 1 11Guangzhou 1 3Shanghai 1 21Hangzhou 2 7Xuzhou 3 8Total 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 findingsResearch methodology - a2 Milk pricing dynamics across channels
English Labelled Chinese Labelled
Woolworths Pricing (RMB135)Source: Devon
Online Platforms
China findingsResearch methodology - Mainland a2Milk infant formula vendor profiles
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Geographic Reach
Prod
ucts
Ran
ge
Premium Supermarkets
Regional MBSIndividual MBS
Source: Devon
China findingsResearch 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, premiumsupermarkets, MBS
DaiGou, premium supermarket, online, 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 projectResearch 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 projecta2Milk IP?
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Source: a2Milk investor presentation
Infant formula - China research projectNestle (incl. Wyeth) - the elephant in the room
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(%) 2015 2016 2017Wyeth 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 projectSummary/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
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