A2 Milk reports 27% profit increase in 2022-23 amid challenges in Chinese market

Company News

by Glenn Dyer

The A2 Milk Company (ASX:A2M) has announced a notable 27% rise in profit for the fiscal year 2022-23. This achievement was primarily driven by the company's success in capturing a larger share of the contracting Chinese infant formula market. However, the company has issued a cautionary note, signaling that the coming year will likely pose more formidable challenges.

The use of the term "challenging" in the report has attracted the attention of investors who remain skeptical about the Chinese economy and consumer demand. Despite this skepticism, the results for 2022-23 are seemingly of higher quality compared to the preceding two years, particularly due to A2's ability to thrive in the Chinese market's adversity.

A2 disclosed that its net profit surged to $NZ155.6 million in the year ending in June, up from $NZ122.6 million in the prior year. Revenue also climbed by 10% to reach $US1.59 billion, indicating the company's success in improving its margins — they increased from 13.6% to 13.8% year over year.

Notably, for the first time, revenue from the "China and other Asia" market surpassed the $NZ1 billion milestone, constituting 63% of total sales revenues.

Looking ahead to 2023-24, the company anticipates a slower pace of growth, projecting "low single-digit revenue growth."

A2 Milk Company managed to grow its infant formula product sales in the Chinese market by 8.4%, despite an overall market decline of 14%. This decline is attributed to factors such as a diminishing birth rate, heightened competition, and an economic slowdown in China.

CEO David Bortolussi acknowledged the challenges in the Chinese infant formula market, stating, "The China IMF market has become increasingly challenging as a result of lower birth rates and increased competitive intensity." He predicted further challenges in the upcoming fiscal year, with an anticipated double-digit decrease in market value.

Bortolussi also commented on the past few financial years, revealing, "Market conditions over the 2021 to 2023 financial years had been more challenging than expected with the value of the English label infant formula market down 25% and the Chinese label market value down 16%."

Despite the hurdles, Bortolussi expressed confidence in A2 Milk's ability to invest and enhance its market share this year, positioning the company for a stronger comeback when market conditions improve.

While no dividend has been declared, A2 highlighted the completion of an on-market share buyback totaling $NZ149.1 million, leaving the company with net cash of $NZ757.2 million at the end of June.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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