The official signing earlier this month of the China-Australia Free Trade Agreement (ChAFTA) brings the nation’s slate of FTAs to ten, but is arguably the most important. The China FTA covers trade already worth $160 billion a year. When it is fully implemented, about 95% of Australia’s exports to China will be tariff-free.
Eliminating tariffs will increase opportunities for Australian business in a wide range of sectors. Much of the initial focus has been on the effect on Australia’s major agricultural exports – such as meat, dairy and horticulture – and the potential ramp-up of exports to meet China’s growing demand for high-quality food. Resources and energy exporters will also benefit. A policy paper on the China-Australia FTA commissioned by the Minerals Council of Australia estimates that scrapping tariffs under the deal would save exporters about $600 million in costs – the bulk of those savings (about $380 million a year) accruing to coal exporters.
But the China FTA will also provide (or greatly improve) access to the colossal Chinese market for a wide range of Australian services companies, including banks, insurers, law firms, engineering firms, healthcare and aged care companies, professional services suppliers, tourism and education services providers.
As well as the FTA, Australian companies are also benefiting from the steady progress in linking the Chinese and Australian currencies, which began in earnest in November 2011 with the establishment of convertibility between Australian dollars and Chinese renminbi (RMB) in the inter-bank market in China. Australia is now officially a RMB trading hub. Australian companies trading with China can pay and receive RMB, eliminating US$ exchange rate risk and the cost of conversion.
One of the industries most enthusiastic about the China FTA is the dairy industry, which describes it as a “game changer” that may enable the industry to make up the ground lost to New Zealand, which has had a FTA with China covering NZ dairy since 2008.
Ten years ago China imported about $200 million in dairy products. Today it imports about $6 billion of dairy annually and growth is not slowing. Rabobank estimates that China will face a supply gap in the next few years of 10 billion litres of milk. The China FTA will see fresh Australian milk become more affordable in China. Tariffs on fresh milk are 15%, but that is slated to fall to zero within a decade. The 15% tariff on infant milk formula will be phased out over four years, while other products will be tariff-free within nine to 11 years.
The beef and livestock industry is also excited about the FTA, which will see tariffs currently levied on Australian beef of 12%–25% being eliminated over nine years, delivering an $11 billion benefit. Winemakers also see great opportunities to supply China’s emerging middle-class – and high-income – consumers. Wine is one the biggest winners from the FTA, with the current tariffs of 14%–30% on Australian exports being eliminated within four years. The China FTA potentially makes Australian wine more competitive against New Zealand and South American brands, in particular.
The real benefits of the China FTA will not flow through overnight, but the deal should certainly benefit a wide range of Australian companies. Here is a snapshot of some of the key winners.
Bega Cheese (BGA)
Market capitalisation: $687 million, $4.50
Dairy producer Bega Cheese owns the famous Bega brand, Australia’s number one selling cheese brand. It also owns Tatura, which makes lactoferrin, infant formula and other dairy products. In September Bega signed a $100 million UHT milk deal with China’s Chongqing General Trading Group, and the company says the FTA deal has instigated a “ramp-up” of enquiries coming from China.
According to Thomson Reuters, Bega’s analysts have a consensus price target on the stock of $4.78, implying upside of 6.2% from this point. There is also a fully franked dividend, but that is only a minor contributor to total return, expected on analysts’ consensus to come in at just 2.2% in FY16.
Freedom Foods (FNP)
Market capitalisation: $428 million, $2.80
Specialised (allergen-free) food company Freedom Foods (FNP) has joined a consortium called Australian Fresh Milk Holdings to ramp up milk production for the Chinese market, joining forces with China’s giant New Hope Dairy group and two of Australia’s largest dairy-farming families. New Hope will invest up to $500 million in Australian dairy farms and processing plants. Freedom’s Pactum dairy division already supplies premium long-life milk to Bright Dairy, one of China’s largest dairy companies.
Freedom also owns an 18% stake in NZ company (but ASX-listed) A2 Milk Company (A2M), which makes and distributes A2-branded dairy products (free from the A1 milk protein). On Thomson Reuters numbers, analysts see a consensus price target of $3.20 on Freedom Foods, and a fully franked divided yield of 2.6% in FY16.
Murray Goulburn (not yet listed)
Australia’s largest dairy exporter, Murray Goulburn plans to list on the ASX later this year in a $500 million listing, after the co-operative puts to its farmer members a capital restructure proposal that includes listing a unit trust.
Murray Goulburn is the nation’s biggest dairy exporter, collecting almost 40% of Australia’s 9.1 billion litre milk pool. The company says that on the back of the FTA it could buy a stake in a Chinese player or invest in distribution channels: the capital raising is all about funding Murray Goulburn’s growth strategy, and “China is at the centre of those plans,” the company says.
Australian Agricultural Company (AAC)
Market capitalisation: $719 million, $1.35
Beef producer AAC owns the largest beef herd – and biggest Wagyu beef herd – in Australia, and has its new Darwin processing operation up and running, making it a fully vertically integrated, branded “paddock to plate” beef producer. The tariff reduction should result in much larger volumes of Australian beef being sold to Chinese consumers, and AAC is a premium producer likely to appeal to a market that is increasingly interested in knowing exactly where its food has come from. However, AAC is currently a loss-maker, and has slumped 18% since April.
Elders (ELD)
Market capitalisation: $322 million, $3.84
Agribusiness Elders is one of Australia’s largest exporters of live cattle, and should also benefit from the China FTA, as it builds-in transparency and traceability throughout its live export business supply chain. However, Elders made a loss in FY14 and while it is expected to return to profitability in FY15, analysts see the stock as fully-valued at present, and there is no dividend expected in FY15 or FY16.
Ruralco (RHL)
Market capitalisation: $281 million, $3.61
Agribusiness Ruralco established a live cattle export partnership called Frontier International in October 2013, exporting cattle both for consumption and breeding purposes. While the initial focus has been on Indonesia, Vietnam and China, Ruralco says there is definitely potential in China on the back of the FTA and the associated live export protocol. RHL also has businesses in rural supplies, livestock and real estate agency, and water services. On FN Arena numbers, Ruralco’s analysts have a consensus price target of $3.90 on the stock, and expect a fully franked dividend yield of 5.6% in FY16.
Treasury Wines (TWE)
Market capitalisation $3.3 billion, $5.11
Treasury Wine Estates, which owns brands including Penfolds and Wolf Blass, already generates about 12% of its premium wine export revenue from China. The Australian wine industry is struggling with ongoing over-capacity and quality challenges, but the China market is very promising and tariff removal should allow Treasury to sell more wine in the country. In the short term, Treasury’s analysts see the stock as over-valued, with a consensus price target of $4.76, substantially below the current price. Analysts expect an unfranked yield of 3% in FY16.
Australian Vintage (AVG)
Market capitalisation $87 million, $0.375
Last August Australian Vintage signed a long-term China-wide distribution agreement with COFCO Wine & Spirits, an arm of China’s largest food processing manufacturer and trader, COFCO. The core brand McGuigan Wines has become COFCO’s strategic partner in Australian wine, giving the Australian label access to a massive distribution network across China. If Australian Vintage can come through with the 2.5 cent dividend expected in FY16 by analysts’ consensus, on Thomson Reuters numbers, that would equate to a hefty 6.7% dividend yield – with full franking augmenting that even further in the hands of SMSF holders. The analysts’ consensus target price of 42 cents also implies capital gain in the offing.
Ramsay Health Care (RHC)
Market capitalisation: $12.4 billion, $61.21
In May, private hospital operator Ramsay Health Care struck a new 50:50 joint venture with Chinese healthcare company Chengdu Jinxin Healthcare Investment Management, involving five hospitals in Chengdu, operating 2,300 beds. The China FTA permits Australian medical service suppliers to establish Australian-owned hospitals and profit-making aged-care institutions in China.
Beijing has announced plans to sell 7,500 public hospitals – 10% of its hospitals – to the private sector over the next decade, and Ramsay’s foothold in the market should enable it to participate further in a market that has very favourable demographic factors: a population of 1.3 billion, a growing middle class, and an ageing population. Ramsay’s portfolio is spread across Australia, the UK, France, Indonesia and Malaysia, but China should ultimately become an important part of the business. On FN Arena numbers, Ramsay’s analysts have a consensus price target of $65.17 on the stock, and expect a fully franked dividend yield of 2% in FY16.
*All charts sourced at Yahoo!7 Finance, 22 June 2015
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