Bubs doubles down on Chinese market, signs strategic equity alliance

Although Sino-Australian trade relations remain strained, one business not feeding into that narrative is Bubs Australia (ASX: BUB), which announced an incentivised share agreement with its lead daigou distributor today as it looks to rapidly expand its Chinese consumer base.

With sales through channels into China (corporate daigou sales) at a record high, and December half gross revenue up 276 per cent - exceeding pre-COVID levels, the goat milk baby formula maker believes the time is right to establish a deeper strategic partnership with prominent channel partners.

Having worked closely with its distributor partner Hong Kong-based Willis Trading for several years, Bubs has entered into an equity-linked alliance, representing 4.82 per cent of shares, conditional on purchase milestones being met over the next 18 months.

“The next phase of our partnership is an exceptional and innovative opportunity to deepen our engagement with the daigou channel and get closer to our end consumers in China,” Bubs founder and CEO Kristy Carr said.

“This strategic alliance between Bubs’ brand power and the channel’s deep understanding of Chinese consumers provides more direct identification of our target consumers and their product needs in real-time.

“Word of mouth and peer endorsement is critical in our category, and we view the daigou channel as expert community builders - through one person, we can reach hundreds of consumers."

Willis Trading, a wholly-owned subsidiary of Hong Kong-listed Alpha Professional Holdings, will need to hit purchase milestones of at least $50 million in FY22 and $120 million in FY23 for the agreement to take effect.

The strategic alignment with Alpha Group plays into existing synergies, as one of Alpha’s principal businesses is trading milk powder and infant nutrition products to China, including Bubs and CapriLac products.

Carr believes the new business model will deliver heightened supply chain traceability and channel inventory transparency.

“Developed in response to the pandemic, the new supply chain model delivers seamless delivery to our end consumers with heightened traceability and visibility of inventory throughout the channel, whilst operating within the Chinese government tax system,” Carr said.

“Building on the momentum already established under Bubs’ daigou 2.0 strategy, we are confident the deeper collaboration embodied in this transaction will rapidly accelerate our China business and provide a platform for future innovation that will widen our points of engagement with our target consumers.”

Founded in 2006, Sydney-based Bubs has a range of premium Australian infant nutrition and goat dairy products, including speciality and nutritional milk powder products.

In its half-yearly results announced last week, infant formula consisted of 54.7 per cent of the revenue of the company ($18.4 million), while revenue from adult goat dairy products was $8.7 million and raw materials $5.3 million.

Bubs received $19.4 million in revenue from China in H121, compared to $6.2 million in Australia, indicating the importance of daigou channels. Bubs’ corporate daigou channels are digital marketing and consultancy companies that include retail daigou agents in their business operations through formal channels or platforms.

“We have witnessed the Daigou Channel evolve from a fragmented network in the past to become a genuine corporatised channel,” Bubs executive chairman, Dennis Lin said.

“Daigous play an integral role in assisting Australian brands in understanding and reaching Chinese consumers, whilst simultaneously enhancing brand equity.

“We have the upmost respect for what this entrepreneurial community have built and the contribution they have made in creating value in many leading Australian brands, including bubs."

Shares in Bubs (ASX: BUB) were up 2.25 per cent, as of 10.45 am AEDT, following the announcement.