Bellamy's shares are being annihilated

Photo: Philippe Hugeun/AFP/Getty Images)

Tasmanian organic infant formula producer Bellamy’s (ASX: BAL) has seen its share price nearly halved in early trade after reporting weaker sales in China.

Nearly 43% was wiped from the shares this morning to sit at $6.90, extending its decline from August 24 to 55%.

The poor result has also hit other players in the sector, with Blackmores down nearly 6%, along with Bega Cheese and A2 Milk falling 13%.

Bellamy’s share price has recovered slightly heading towards midday, but remain down by around 37%.

Among the reasons for the sell off was news that while Singles Day sales in China improved on 2015, they were below company expectations.

CEO Laura McBrain said: “We more than doubled revenue growth on Singles Day across all e-commerce platforms compared to last year. Bellamy’s Step 3 was the 9th best performing product across T-mall Global1 on the day. The growth however fell short of our expectations”.

The business is also facing headwinds due to regulatory changes there, warning of “temporary volume dislocation” as it gains approvals under the new regulatory framework.

The business is also up against brands it believes won’t be about to gain approval who are dumping their product, Bellamy’s says.

“Brands that are unlikely to gain registration are liquidating inventory at discounted prices, which impacts both imported brands such as Bellamy’s and the market overall,” Bellamy’s said.

“As with the broader infant formula market, Bellamy’s has experienced restructuring of the sales channels into China since the regulatory announcements. Management has worked closely with the various e-commerce networks to build stronger, more efficient routes-to-market that are expected to support increased demand following the regulatory change over.”

Subsequently, revenue has stagnated this financial year and is expected to be lower at $240 million, down from $244.6 million last year. Analyst expectations were around 50% higher based on growth over the previous 12 months.

The company’s view was much more subdued in its statement to the ASX, saying:

Based on Bellamy’s current view of its end markets, revenue for 1HFY17 is anticipated to be approximately $120 million.

While Bellamy’s remains positive regarding its long term outlook, if current trends in its existing channels-to-market continue, 2HFY17 revenue will be similar to the first half.

The Company has recently commenced initiatives to expand its distribution footprint in China. The benefits of these efforts are expected to contribute incremental revenue over and beyond this run rate and potentially beginning in late 2HFY17, although the timing is uncertain and could be early 1HFY18.

But Bellamy’s still argues the opportunities in China are “vast” because it’s only stocked in “less than 5% of the potential distribution points”.

Bellamy’s EBIT margin will be “moderately below 20%”, down on 22.2% on the previous financial year.

It says revenue is up 24% to November 20, compared to the previous year.

The early gold rush in supplying infant formula to China appears to have waned in recent months

In August, Bellamy’s, a pioneer in the Chinese market, posted impressive annual results for 2016, with the dividend up 316% on 2015, with net profit after tax up 322% to $38.3 million and revenue 95% higher at $244.6 million.

The company’s shares are trading at $14.27 at that point. Two years ago it was about $1.30.

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