Devon Funds Management China Research Trip March 2018 Prelude ATM - PowerPoint PPT Presentation

Devon Funds Management China Research Trip March 2018

Prelude ATM 1H18 result 2 a2Milk EBITDA by Geographic a2Milk Sales by Geographic Segment – NZ$m Segment – NZ$m 140 350 116 304 120 300 100 85 80 70 250 233 206 60 50 48 200 35 168 40 19 14 20 150 8 128 1 114 0 100 -8 -8 -8 -20 A -12 -15 51 38 -40 50 30 1H16 2H16 1H17 2H17 1H18 16 8 15 12 9 3 ANZ China UK & US - 1H16 2H16 1H17 2H17 1H18 EBITDA Margin (%) ANZ China UK & US 1H16 2H16 1H17 2H17 1H18 ANZ 27% 30% 34% 36% 38% A) Consensus pre-result 1H18 China Sales (c. NZD75mn) China 14% 27% 37% 37% 42% UK & US -281% -80% -65% -161% -52% Source: Devon/Company financials

Infant formula - China research project Focus 3  Investigate retail penetration  Understand Competitive dynamic  City tier differentiation (Shanghai vs Xuzhou)  Pricing  Brand acceptance

Infant formula - China research project Research methodology 4  Two analysts to China  Shenci Tang (Devon analyst) – store level  Visit retail stores  Interview staff  Observe pricing  Interact with WeChat groups  Understand buying behaviour  Observe store inventory  Observe inter-tier city sales dynamic

China research trip Research methodology - locations visited 5 Trip Overview City Tier Stores Visited Hong Kong SAR 21 Shenzhen 1 11 Guangzhou 1 3 Shanghai 1 21 Hangzhou 2 7 Xuzhou 3 8 Total 71 Source: Devon

China findings Research methodology - a2 Milk pricing dynamics across channels 6 English Labelled Chinese Labelled ¥600 ¥500 ¥458 ¥458 ¥428 ¥428 ¥398 ¥398 ¥400 ¥300 ¥263 ¥263 ¥245 ¥239 ¥239 ¥238 ¥235 ¥210 ¥210 ¥200 ¥100 ¥- Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 DaiGou CBEC Hong Kong eCommerce MBS Woolworths Pricing (RMB135) Source: Devon

China findings Research methodology - Mainland a2Milk infant formula vendor profiles 7 Products Range Online Platforms Premium Supermarkets Individual Regional MBS MBS Geographic Reach Source: Devon

China findings Research methodology - a2Milk infant formula buyer profiles 8 Tier 1 City Tier 2 City Buyer HK Buyers Tier 3 City Mothers Mothers Mothers DaiGou Chinese Mothers DaiGou, premium Chained Pharmacies DaiGou, premium Premium super Preferred Channel supermarket, Local MBS (i.e. Watsons) supermarkets, MBS market, MBS online, MBS How did you hear Clients’ demand Online forums, word of mouth about a2? Price profile HKD250 - HKD550 RMB200 – RMB450 RMB200 – RMB450 RMB350 and above RMB250 and below Understanding of No No No No No a2 USP It’s from overseas and many others around The most expensive Tier 1 city mothers Reason for buying Clients’ demand me use it infant formula buy it, so I want it Source: Devon

Infant formula - China research project Research methodology 9  Mark Brown (Devon CIO) – Macro level  Understand regulatory environment  Producer meetings  Nestle  Yashili  Bellamy  Blackmore  Online meetings  JD.com  Amazon China  Consumer panel

Infant formula - China research project a2Milk IP? 10 Source: a2Milk investor presentation

Infant formula - China research project Nestle (incl. Wyeth) - the elephant in the room 11 (%) 2015 2016 2017 Wyeth 13.6 14.8 14.3 Nutricia 13.1 11.0 10.6 MJ 9.2 9.6 9.7 Friesland 7.1 7.6 8.1 Abbott 6.9 7.5 6.9 Biostime 5.9 5.8 5.5 Yili 4.9 5.0 5.2 Beingmate 4.9 4.6 4.8 Nestle 3.9 3.8 4.0 Firums 3.5 3.6 3.5 * Source: Nielson Source: Devon

Infant formula - China research project Summary/other observations 12  Consumers have no real understanding of organic or A2  Formula then provenance are the key consumer factors  ATM brand well recognised  ATM instore merchandising good but is Illuma excellent  Sales assistants are key in retail – Illuma 7,000 : ATM 700  Illuma in 40,000 stores vs ATM 7,000  Illuma marketing spend $300m+ vs ATM $35m (next half)  Regulation still cloudy – government dept. consolidation  Corporate Dàigòu not trusted – perception of fakes

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