Perhaps the biggest winner from Chinese exposure this earnings season was The a2 Milk Company, which posted a rise in net profit of 55.1 per cent to $152.7 million, beating expectations.
Included in this result was a 50.1 per cent jump in baby formula sales in China for the first half of 2019. Analysts at Macquarie maintained an outperform rating for the stock and said infant formula sales were “driven by improved velocity and distribution”.
Blackmores’ writing on the wall
Negative effects filtered through to Australia too. China sales growth for health supplements company Blackmores swung from rising 30 per cent in the first quarter of 2018-19 to contracting 14 per cent in the second quarter, according to analysts at Morgan Stanley.
The broker said Blackmores’ weak result was driven by “a lack of channel clarity in China”, which it believed would “take time to mend”. Morgan Stanley predicted Blackmores sales in China would continue to decline in the short-term.
J Capital Research managing partner Tim Murray said the writing was on the wall for Blackmores and the company had “obfuscated the poor performance of their China operations” for some time.
Mr Murray said Blackmores’ Chinese operations still relied heavily on sales of fish-oil supplements, the product that first brought them success in the country, whereas a competitor such as Swisse had diversified the products it marketed to Chinese consumers and thus had more opportunity for growth.
Weaker consumer sentiment
Goldman Sachs highlighted weaker Chinese consumer sentiment as a risk factor for Treasury Wine Estates performance. “Asian performance is likely to be impacted by an anticipated slowdown in consumer spending,” the broker said.
It downgraded the stock to sell despite the company reporting results “broadly in line with expectations”.
Crown Resorts’ result presented “challenging times ahead”, according to Macquarie, because of disappointing numbers from VIP patrons, where revenues are now expected to decline by 30 per cent in the second half of 2018-19. This was due partly to continuing macro challenges out of China, negatively affecting Macau VIP volumes, according to the broker.
However, the effect of exposure to China can be overestimated. For example, Mr Murray waved away concerns about a ban on coal imports from the Dalian Port Group, announced last week.
“It’s not a significant port for Australia,” said Mr Murray, who lived in the northern Chinese city of Dalian in 1994 and visited several years ago. He said he would return to visit the port within the next few weeks.