After increasing slightly in 2024, births in China are falling again. There were about 8 million births in China in 2025, 17% fewer than in 2024, per the Bureau of Statistics of China. This represents a sharp decline from around 15 million births in 2019. Shares in a2 Milk (ASX: A2M) fell about 12%.

Why it matters: We lower our fiscal 2026 EBITDA forecast by 2% to NZD 306 million, and our longer-term forecasts by about 5% on average. Most of a2 Milk’s earnings are generated from selling infant formula to China. As such, Chinese births in China are a crucial driver of demand.

  • We expect births to continue to decline over the next decade, albeit more gradually. China’s demographic challenges aren’t going away. The population of women in their 20s is set to continue declining over the coming years, limiting the likelihood of a sustained uptick in births.
  • We think the company can offset fewer babies with price increases and further market share gains, provided consumers continue to place a premium on the a2 brand. But we now expect this to come with higher marketing costs as infant formula brands compete for a smaller market.

The bottom line: However, we raise our fair value estimate by 16% to NZD 9.30 (AUD 8.00). The reduction to our earnings forecasts is more than offset by a lower weighted average cost of capital assumption. We now assign a2 Milk a weighted average cost of capital of 8.5%, from 10% previously.

  • A2 Milk has practically no debt, infant formula demand is typically defensive, and its English-label supply chain issues are firmly in the rear-view mirror. But consistent with our Chinese coverage, we assign an additional 1% country risk premium compared with other consumer defensive companies.
  • After the fair value upgrade, shares in a2 Milk are roughly fairly valued. Consumers in China are willing to pay up for the a2 brand. This pricing power has driven market share growth despite unfavorable demographic conditions, underpinning the firm’s narrow economic moat.

A2 Milk’s brand equity in China underpins its Narrow Economic Moat

A2 Milk has built a brand that we expect to generate economic profits for years to come. China is the key battleground. A2’s future growth relies heavily on further successful penetration of the Chinese infant formula market, which we estimate makes up the vast majority of earnings.

A2 is a licensor and marketer of fresh milk, infant formula, and other dairy products that lack the A1 beta-casein protein. Dairy cows naturally produce two beta-casein proteins in their milk: A1 and A2, which differ by one amino acid. A2 milk is produced by cows that naturally produce milk only containing the A2 protein; genetic testing is done to build herds of supply. Some studies have suggested the A1 protein may be associated with serious health issues, although a2 Milk only asserts that milk with only the A2 protein may positively affect digestive function.

Consumers have flocked to a2 Milk as a result of these perceived health benefits, helping to expand market share in Australian fresh milk, as well as infant formula in Australia and China following the launch of a2 Platinum in 2013. These gains have occurred alongside premium price points. In Australia, a2 Milk is typically more than double the price of private-label offerings, while a2 Platinum has higher pricing in Australia and China versus other leading brands.

Continued success in the Chinese-label business is crucial for a2. While the English-label business has stabilized, we think the Chinese-label business will more durably drive market share growth without the same reliance on resellers. Indeed, a2’s marketing and distribution investment has shifted to focus on the Chinese label business. This appears to be reaping rewards with brand awareness and loyalty improving across the board, boding well for the long-term health of the a2 brand in China, which underpins the firm’s narrow economic moat.

Bulls say

  • China remains a major long-term growth opportunity for a2 and should help to drive continued margin improvement.
  • While the science is currently uncertain, further studies on the benefits of A1-protein-free dairy products could support positive health claims for a2 Milk.
  • A2 generates solid free cash flow, which could be used to make accretive acquisitions or vertically integrate, or returned to shareholders.

Bears say

  • A2 relies heavily on only two major suppliers, which risks price hikes, supply challenges, or future competition.
  • The company fights against strong competition in China and elsewhere. In the longer term, a2 may be undercapitalized to take on the marketing arms of dairy behemoths such as Nestlé and Danone.
  • China could further alter the regulatory environment for infant formula, which may lead to supply disruptions for a2 or a greater ability for local manufacturers to compete.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.