Following are 7 stocks that appear to set examples of how rising Chinese demand for Australian products, is benefiting some ASX equities. Last year, some of these stocks witnessed a beating down when China announced for sudden changes to its cross-border e-commerce regulations. However, with many agreements in place, registrations sought and rising popularity of brand names, the stocks have been again in action in the later part of this year. Meanwhile, the recent first foreign policy white paper by Prime Minister Malcolm Turnbull, Foreign Minister Julie Bishop and Trade Minister Steven Ciobo, cautions that while the country has benefited economically from China, the latter has the ability to give importance to its newfound regional influence for own interests and this can jeopardize the way Aussie companies are currently gaining traction in China.
 

Capilano Honey Ltd

Sales to China grew 39% in FY17: Capilano Honey Ltd.’s (ASX: CZZ) FY17 sales revenue was affected due to a key customer’s move to net pricing, which had lowered both revenue and rebates by $3.44m, though there was no effect on gross margin. However, the NPAT grew 9% to $10,335. Moreover, the Australian retail market is growing, and domestic retail sales were up over 6%. The export revenue was down due to lower international honey prices and greater competition, mostly in lower margin industrial segments. Additionally, in FY17, the sales to China grew 39%. In China, sales are growing from a larger distribution base, including pharmacy, grocery, TV shopping and a recently launched ecommerce platform. Meanwhile, CZZ stock has risen 11.23% in three months as on November 22, 2017 and is expected to leverage from the growing revenue base in China and other regions. Given the trading scenario, we put a “Hold” recommendation on the stock at the current price of $ 18.18

 

FY17 Financial Performance (Source: Company Reports)

Freedom Foods Group Ltd

Accelerated FY18 Outlook: Trading at a very high forward price to earnings level, Freedom Foods Group Ltd (ASX: FNP) experienced a strong demand across all business activities in Australia, SE Asia and China in FY17, and has significant pipeline of differentiated products across all key categories to further boost sales in CY18. In FY18, FNP expects the total volumes processed to be in excess of 150 million litres from its UHT Dairy facility, increasing to 240 million litres in FY19; while the facility had processed only 85 million litres in FY17. Overall, the group aims to benefit from the current contracts and demand growth from Australia, SE Asia and China. Moreover, on the basis of current and expected demand in the second half of FY18, FNP expects the net sales revenues to be at the higher end of the range of $340 to $360 million, as compared to $262 million in FY17. While there exists some potential, the stock trades at high levels and we believe it to be “Expensive” at the current price of $ 4.91

a2 Milk Company Ltd

Direct sales into China have grown significantly: a2 Milk Company Ltd (ASX: A2M) has witnessed continued success of its a2 Platinum in China in FY17. The direct sales into China has grown significantly in cross border e-commerce channels (CBEC) and mother baby retail stores (MBS). China’s infant formula sales’ growth has risen to 150% in FY17 from FY16 and China Label accounted for approximately 6% of group infant formula sales in FY17 that grew to approximately 8% in 2H17. Moreover, in FY18 year to date, the distribution in China Mother Baby channel exceeds 5,800 stores and the group has sought China Food and Drug Administration (CFDA) registration for its China label infant formula via Synlait. There are possibilities that the group attains a good chunk of revenue from its China base. Meanwhile, A2M stock has risen 76.22% in last three months as on November 22, 2017 but slipped by about 4% on November 23, 2017, which may be at the back of the lately signaled cautious view of the Australian government on China and some profit booking on the stock. Given the stock price run-up and trading scenario, we maintain an “Expensive” recommendation at the current price of $ 7.60

Bellamy's Australia Ltd

‘Chinese label’ sales to occur in 1H18: Bellamy's Australia Ltd (ASX: BAL) has upgraded its forecast FY18 revenue growth to be 15-20% from earlier stated 5-10%. The company is expecting 1H18 revenue to be higher than 2H18 given the factors that include timing of platform events, impact of winter consumption and so forth. Further, the ‘Chinese label’ sales, have been said to occur only in 1H18 due to the expected delay in CFDA registration. Moreover, BAL has upgraded the forecast of FY18 EBITDA margin to 17-20% from 15-20%. Meanwhile, BAL stock has risen 53.32% in last three months as on November 22, 2017, and we maintain a “Hold” recommendation on the stock at the current price of $ 11.84

 

FY18 Upgraded Guidance (Source: Company Reports) 

Blackmores Ltd

28% growth in the direct China sales in 1Q FY18: Blackmores Ltd.’s (ASX: BKL) stock has risen 86.14% in three months as on November 22, 2017, as the company in 1Q FY18 reported 28% growth in the profit to $15.4 million and 9% growth in the revenue to $134 million compared to the prior corresponding period. Moreover, in the first quarter of FY18, BKL reported 28% growth in the direct China sales, launched a new range of kids’ products that are more than 99% sugar-free, had maintained tight cost control while continuing to invest in key growth platforms, and launched a new world-class education platform. However, Australian retail remains challenging and this was compounded by strong sales at the end of the fourth quarter, that had impacted the July result in Australia. The consumer sentiment in Australia is subdued while there is strong consumer demand from Chinese consumers. We believe that the stock is still “Expensive” at the current price of $ 168.02
 

1Q 18 Financial Performance (Source: Company Reports)

Elders Ltd

Cattle prices expected to ease in 2018: Elders Ltd (ASX: ELD) in FY18 expects the live cattle export volumes to rise by around 4% in 2018 due to the stronger export demand from the major markets of Indonesia and Vietnam and the opening up of the China market. However, the cattle prices are expected to fall in 2018 due to the weaker export demand (principally Japan) and strong export competition from United States. Given the inadequacies on cattle price front which are indicated to be offset by EBIT improvement efforts to some extent, coupled with high trading levels;we put an “Expensive” recommendation on the stock at the current price of $ 6.59

Select Harvests Ltd

Commenced China consumer packaged products sales in FY17: Select Harvests Ltd (ASX: SHV) commenced China consumer packaged products sales in FY17. On the other hand, SHV had received a non-binding, indicative and highly conditional proposal from Mubadala Investment Company PJSC to acquire 100% of SHV for $5.85 cash per SHV share, which is approximately $430.6 million on an equity value basis. However, the group highlighted that the proposal undervalued the company to a large extent and it did not intent to take-up any discussions in this regard unless a revised proposal is made. On the other hand, the group aims to strategize on its export sales’ expansion efforts through marketing models in regions including China. While we look forward to any positive catalysts, we give an “Expensive” recommendation on the stock at the current price of $ 4.45

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