Darling dairy stocks dumped after Bellamy's China warning

Australia's one-time darling dairy stocks were dumped by investors on Friday after Bellamy's Australia warned recent import rule changes in China had crimped sales of its organic infant formula amid discounting by rivals. By Patrick Hatch.
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The uncertainty flowed through to other Australasian dairy exporters, with shares in A2 Milk down 10 per cent, and Bega Cheese – which has an infant formula partnership with Blackmores – down 6 per cent. Blackmores shares fell 3.6 per cent.
Under the Chinese rule changes, announced in April, all foreign companies – including Bellamy’s and Blackmores – have to apply for fresh product registration if they wish to continue selling their products across China’s crossborder e-commerce channels.
China has given companies until January 1, 2018 to adhere to the new rules, which are part of the country’s revision of its food safety laws.
In a business update on Friday, Bellamy’s said brands unlikely to get approval had been liquidating stock at discounted prices, hurting all brands in the market.
It also said sales on last month’s Singles’ Day – China’s largest online shopping event – while «significantly stronger» than last year, had fallen short of its expectations.
Bellamy’s, which is backed by high-profile investors including Crown Resorts chairman James Packer, said total revenue from July 1 to November 20 was up 24 per cent to $93 million, compared with the same period last year.
But it warned it would continue to experience «temporary volume dislocation» until regulatory registrations were completed in China.
Revenue for 2016-17 was expected to be about $240 million, down on last year’s $244.6 million and well below analysts’ expectations of about $368 million.
Bellamy’s also said its pre-tax margin would come in «moderately below 20 per cent», following last year’s 22.2 per cent.
While Australia still contributes the majority of Bellamy’s sales – 78 per cent in 2015-16 – its business has been growing strongly in China, where parents have well-founded concerns about the safety and purity of baby food.
Revenue from direct sales in China, where its products are stocked in more than 2000 stores and sold online through third-party websites like Tmall, JD, VIP and BabyTree, rocketed 331 per cent to $62 million last financial year.
Bell Direct analyst Julia Lee said the company’s trading update was disappointing, particularly after rival a2 Milk delivered an upbeat trading update on November 22.
«Given that the update was mainly around China and temporary volume dislocation, that’s what has the market worried,» Ms Lee said.
Friday’s announcement was «quite a big adjustment». «Investors are used to seeing triple-digit gains in revenue from Bellamy’s,» she said.
Lloyd Moffatt, an analyst at independent research house Religare Institutional Research, said the company was well run and had a quality product and good business model but its share price had been «unjustifiable».
«I think today was a reset. Going forward, the management team is going to have to increase the transparency they give to the market to regain any credibility,» he said.
Bellamy’s said despite the setback in China, the opportunity for the company there «remained vast», and would grow with the new regulations.
«As a premium brand with a high-quality product offering, Bellamy’s anticipates that the upcoming regulatory changes should have a positive effect in both online and offline channels,» the company said.
Bellamy’s has had a rollercoaster ride since its ASX debut at $1 a share in August 2014. The stock hit a high of $16.50 in January but has lost ground since the regulatory changes in China began.
Source: SMH
Link: http://www.smh.com.au/business/markets/bellamys-australia-shares-plunge-on-soft-china-sales-20161202-gt2g3r.html

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