ATM - A2 Milk Corporation Limited

[NT001]

MAC, aren't we rather guessing in the dark here? You're picking an overall net margin of $10m on fresh milk sales. But do we have any idea of transport costs for liquid milk to China, which must be substantial but are not included in the COGS or gross margin. The COGS for the Chinese market would probably be close to that in Australia but it won't include transport, Jingdong's margins and general overheads such as the cost of a2MC staffing an office in China, all of which could reduce the net margin. One assumes all these costs are factored into the wholesale price to Jingdong to maintain a margin, but I don't see how we can deduce that margin from information available at this point, especially as the internet market is said to be fairly competitive.

And is the Jingdong deal the only sales operation for A2 milk? I thought there was also a substantial fresh milk sales operation through retail outlets, especially in Shanghai. Do we know anything about the margins/quantities for this? I know you've been keeping fairly close tabs on all this. I'm not saying your estimate of $10m is too high - it may be too low. But getting established in a new market is never cheap, especially in the first year.

[MAC]

Follow this logic trail NT;

It's a fair abstraction, is it not, that a2mc would not export fresh milk at lower margins than they could sell equivalent milk for in Australia on the domestic market.

I've very conservatively applied domestic margins, because it represents a logical probable minimum.

In reality the actual export margins incorporating transport costs and jingdong mark-ups are most likely to be higher again than domestic margins given the opportunity nature of the venture.

If a2mc hit their target of 3,000,000 litres of 2015 sales they will receive $10M in revenues net of transport costs and jingdong mark-ups, as that minimum.

Doubling each year going forward as advised.

Happy to go through the numbers offline NT, too much detail for this thread.

In regard to establishment costs though, there are really very few beyond export logistics.

The Chinese retailers take delivery and distribute as I understand. The business is already effectively established within the existing New Grange processing facility in New South Wales.

It's not like the UK or the US where a2mc have to establish and grow a totally new geographic business over a period of two to three years.

For the fresh milk sales to China, a2mc arrange logistics, aircraft by aircraft, and ensure quality control up to the point of receipt when collected by the Chinese retailers at the other end.

[NT001]

Follow this logic trail NT; It's a fair abstraction, is it not, that a2mc would not export fresh milk at lower margins than they could sell equivalent milk for in Australia on the domestic market. I've very conservatively applied domestic margins, because it represents a logical probable minimum.....

Thanks for your reasoned explanation MAC. I'm just hoping your "logical probable" starting assumptions are correct. If the market is competitive and the name of the game is to get established there fast at all costs, I was wondering if a2MC might in fact be accepting lower net margins than in Australia. Especially as the home market share seems to have stabilised, not rising as dramatically as it was.

[MAC]

Thanks for your reasoned explanation MAC. I'm just hoping your "logical probable" starting assumptions are correct. If the market is competitive and the name of the game is to get established there fast at all costs, I was wondering if a2MC might in fact be accepting lower net margins than in Australia. Especially as the home market share seems to have stabilised, not rising as dramatically as it was.

There's no sign of the Australian market stabilising off for a2mc, per market share trend below, a2mc have told us they could go as high as 12 to 15% in market share too.

They have suggested though that more farms will be required to satisfy the Chinese market. Again, not something they would do unless the Chinese margins were pretty damn good !

“There could be a longer term need to bring on more farms to meet demand and transport arrangements are likely to evolve with the market, too.”

http://adf.farmonline.com.au/news/ma...2/2713426.aspx

Up, up and away.

ATMms.jpg

[Snoopy]

Harrie, short term the market will swing about all over the place, in this case it’s due predominantly to the AMP overhang and their new portfolio policy requiring them to just sell at any price.

Over the long term the SP will always gravitate back toward valuation, it requires no other reason to do so.

Do remember Ben Graham;

“In the short run, the market is a voting machine but in the long run, it is a weighing machine”

I wouldn't quote Ben Graham on this one Mac. Graham liked to buy shares for less than their cash value.

As at December 31st 2014 shareholder equity is just $9.9m (from 1H2015 presentation dated 25-02-2015). Based on the 660.067m shares now on issue this is a net asset backing of.

$9.9m/660.067m = 1.5cps

So Graham would only be interested if the ATM share price fell to 1c. In Graham terms, ATM the most expensive share on the NZX, overvalued by a factor of 30 at least. You had better hope that the Ben Graham 'weighing machine' doesn't start working in this case.

SNOOPY

[babymonster]

Looks like the 5pm seller is gone.

[NT001]

Maybe just making an early getaway for the weekend.

[blobbles]

Same thing last week. I thinks maybe he is off for a round of golf on Friday arvo.

Lucky he values the company slightly higher than SNOOPY's 1.5c. Or else we may see a rather large price movement!

[babymonster]

I like snoopy

[dodgy]

Hi all,
The biggest catch for this company and in my mind survival or failure is penetration of US market without being tasked over the inferred product benefits. The US is extremely litigious about any health related claims and benefits. Proceed with caution.
- dodgy

Discl: Current holding 25k