Bubs Australia Limited

Strategic acquisition enables higher growth in years ahead: Bubs Australia Limited’s (ASX: BUB) stock climbed up 6.25 per cent on June 08, 2018 after the group announced about entering a Merchant Service Agreement with Alibaba Group and another binding manufacturing agreement with Australia Deloraine Dairy Pty Ltd for CFDA registration. Australia Deloraine Dairy is one of only 15 licenced facilities in the country authorised under the Certification of Accreditation Administration of the People's Republic of China (CNCA) to produce infant formula products for import into China. The objective of agreement with Australia Deloraine Dairy Pty Ltd is to achieve CFDA registration and enabling the group to advance its China expansion strategy for physical export of Bubs Chinese labelled infant formula products into Mother and Baby stores in China. The Manufacturing Agreement will also enhance visibility over its supply chain and product provenance for both its domestic and Chinese labelled products. This Manufacturing Agreement will facilitate CFDA registration and provide a defined pathway to maximising Bubs’ access to 80,000 stores aligned with its partner QianJiaWanPu, China’s largest nationwide distributor of infant formula. Under the terms of the Agreement, Bubs will purchase a minimum volume of 500K tins in the first-year post registration, with annual increments throughout the term, reaching 1.5M tins in the 5th year. Bubs will pay the manufacturing facility a $1M security deposit in instalments on the satisfaction of certain milestones, which will be refunded at the end of the term.

On the other hand, the group has signed a deal with Chinese e-commerce giant Alibaba Group through which the baby food maker is launching a flagship store. The platform will sell Bubs' entire range of formula i.e., infant formula, organic baby food, cereals and snacks to Chinese consumers thereby expanding its presence in the China market where demand for such products is growing. In relation to this, the company is expecting to generate RMB 5 Mn (~A$ 1 Mn) in the first 12 months of trading.  In the past one year, the stock price shot up by 515.38 per cent and is currently inching towards its 52-week high level ($1.100). Hence, we give an “Expensive” recommendation on the stock at the current market price of $ 0.850, and look for a dip in the price.


Performance Update (Source: Company Reports)

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