How powerful Chinese backers are lighting a fire under the Bubs share price

Bubs Australia Ltd (ASX: BUB), Buy, hold, sell?

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The Bubs Australia Ltd (ASX: BUB) share price is up 165% in 2019 after a series of positive announcements and trading updates have fuelled investor enthusiasm in the goat-milk-only baby formula business.

Much of the renewed interest is because Chinese investment fund C2 Capital has taken a $31 million stake (or 15% holding) in Bubs to help it fund the $25 million cash + significant scrip acquisition of the Deloraine dairy in Victoria and other growth initiatives to boost sales in the key overseas market of China.

The C2 Capital investment is noticeable as C2 is also backed by Jack Ma's Alibaba Group and the political or regulatory complexities of operating in the vast Chinese consumer market can make or break an overseas business. Therefore the more Chinese investors or signed-up party members a business has on board the more likely it is to successfully exploit the vast market.

Recently we've seen companies such as Crown Resorts Limited (ASX: CWN) blow-up in China with numerous employees jailed for breaking the law, while others such as Bellamy's Australia Ltd (ASX: BAL) are still waiting for key regulatory licenses.

News reports have also suggested Treasury Wine Estates Ltd (ASX: TWE) has a lot of unsold inventory sitting on the shelves of Chinese wholesale distributors, although this may not be related to regulatory problems.

While Australian thermal coal exporters have also complained about new restrictions being arbitrarily imposed at Chinese ports according to ABC news reports.

As such we can see that China is a huge opportunity, but an unpredictable one for numerous reasons.

For the six months ending December 31 2019 Bubs posted $21 million in sales with China sales up 901% to now sit at nearly a quarter of total sales or around $5 million.

When you consider the kind of sales the a2 Milk Co. Australia Ltd (ASX: A2M) is generating in China you can see that the sky's the limit if Bubs plays its cards right in China.

Motley Fool contributor Tom Richardson owns shares of A2 Milk. You can find Tom on Twitter @tommyr345 The Motley Fool Australia owns shares of and has recommended Crown Resorts Limited and Treasury Wine Estates Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Bellamy's Australia and BUBS AUST FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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