At the end of August the Chinese government passed a new law providing the framework to e-commerce trade covering operators, contracts, dispute resolution and promotion for domestic and cross-border transactions (CBEC). The law covers larger platforms such as Alibaba’s Taobao but also those selling goods via social networks like WeChat.
While details are scant, this law comes into effect from January 2019, when the grace period for selling English label baby formula ends.
a2 chief executive Jayne Hrdlicka and chief executive, Asia Pacific, Peter Nathan said they are conformable with the a2 business model heading into the changes and sales will not be hit at this time.
«We have full confidence there will be no disruption to our business model and this is consistent with the way the market is perceiving the impacts on larger players like [online retailer] Tmall or [French multinational food products group] Danone,» Mr Nathan told The Australian Financial Review.
«The regulator is trying to make sure the retailers are legitimate and regulated, which we fully support. We completely refute that the claim of sales loss come January 1.»
Ms Hrdlicka, who took over the top job in July, added: «The e-commerce law that was passed is a good step in the evolution of China’s e-commerce. It legitimises the channel and it improves the sophistication of the channel and adds consumer protections which are very important.»
Turnover in China’s cross-border e-commerce trade climbed to 90.24 billion yuan ($18.6 billion) last year, with a sharp rise in complaints in products like milk, milk powder and other foods, diapers, health care products and cosmetics, according to news agency Xinhua.
Greater scrutiny
Individual daigou personal shoppers making money by selling smaller parcels of infant formula were skirting the Chinese tax system, and now under the new law will come under greater scrutiny.
Mr Nathan said he expects many individual daigou will funnel through the «corporate daigous», and a2 will be at an advantage. He is not expecting any label changes in January for formula product, and tipped that daigous will be able to continue selling English label product.
Given the close working partnership between a2 and Synlait Milk, and the New Zealand government’s positive relationship with Beijing, sources close to the company said this gives a2 better visibility on shifting regulation by the Chinese government.
But not everyone is convinced. The head of a well-known fund manager, who is not a short seller of the stock, raised concerns around impacts of the new law on product registration and labelling requirements, while a2 executives were selling bundles of shares.
«The market is under the impression that all A2’s infant formula product has Chinese registration and therefore is likely to be unaffected by the new rules, or will even benefit, as unregistered players get knocked out,» he said.
«The reality is that A2’s English label product doesn’t have SAMR [State Administration for Market Regulation] registration, only the Chinese label product does. About 90 per cent of A2’s infant formula sales are English label. It would seem to us that management would clearly understand the implications of the new e-commerce rules.
«Unless the Chinese government extends the grace period, their sales are going to fall off the cliff.»
a2 does not believe the grace period will be extended by the Chinese.
On Wednesday, Bell Potter analyst Jonathan Snape downgraded the stock to a «hold» from a «buy» telling clients there are a number of near-term risks that could emerge over the remainder of year including CBEC regulations. In September, Deutsche Bank cut its call from a «buy» to «hold» on cross-border e-commerce uncertainty.
Mr Snape also heavily criticised the recent sale of about 357,000 shares by Ms Hrdlicka, given her short time frame at the helm.
«If the board was aware that the issued shares were to be disposed almost instantaneously then it should have considered a cash payment (noting a2M exited FY18 with $NZ340.5 million in net cash) to avoid the obvious fallout of a CEO selling stock less than three months following their commencement,» he said.
Sale of shares
There is now substantial pressure on a2 to meet market expectations in the coming months, which has been reflected in the $850 million in value wiped off the stock since Ms Hrdlicka’s sale was announced, he added.
Ms Hrdlicka sold down her entire shareholding in a2, excluding options. She was not the only one selling since the full-year result in August. In total, 16 directors and executives sold about 3 million shares, but combined they still hold 14 million shares in a2. Ms Hrdlicka’s shares were received from the automatic exercise of time-based rights she received as compensation for leaving her prior position at Qantas.
She explained on Friday she had to sell due to tax liabilities and obligations associated with buying a home two years ago.
«I would have liked to have not had to sell my shares, she said. «But they were shares in Qantas that would have vested in August 2018. It’s pretty normal when an executive leaves to go to other role, the way you get them to come across is to buy them out of those shares. These are transition shares … these are a direct replacement of what I was walking away from.»
Ms Hrdlicka said the long-term incentive program is an important part of its executive retention program, and with the extraordinary performance of a2 in recent years many executives’ portfolios have ballooned full of a2 shares with much of their personal wealth tied to the company.
a2 sales have jumped from $NZ155 million in fiscal 2015 to $NZ922 million in fiscal 2018, while its market cap has expanded to $7 billion. It’s a2 Platinum formula is sold in 10,000 mother and baby stores in China and 6000 stores in the US.
Ms Hrdlicka said if the board headed by David Herne had paid her in cash, the amount «would have been eye-popping» and the board likely would have been castigated given it was prior to her commencement date.
«Since the day I signed my contract I have always been aligned to shareholder interests,» she added.
