Bellamy’s Australia Ltd (ASX:BAL) share price went into free fall last Friday when the company downgraded its expectations for the 2017 financial year. The downgrade comes just 6 weeks after its 2016 Annual General Meeting when no such problems were forecast.
The downgrade amounts to roughly a 30% reduction on what analysts had been predicting, with revenues forecast to match 2016 and margins falling by around 10%.
Bellamy’s lays the blame for the downgrade at the feet of the proposed changes by the Chinese government along with competitors rushing to clear stock (at reduced prices) before the legislative changes take affect.
Was the fall justified ?
Pros
- Changes to Chinese laws is outside of the Bellamy’s control, they are also temporary in nature. (hopefully)
- Regulatory changes should result in less competition as the legislation takes affect
- Bellamy’s appears confident they will meet the new requires and be able to continue to sell into the Chinese market
- Demand for Bellamy’s products appears to remain strong as shown by sales numbers at Chinese annual singles day event.
Cons
- Downgrade comes just 6 weeks after its annual AGM which casts doubt on management’s current knowledge of the market or openness to investors.
- Competitor a2 Milk Company Ltd (Australia) (ASX:A2M) recent guidance appears to indicate that they have not been as affected by competitors dumping product. This indicates possible higher brand loyalty to a2 milk products and/or a better understanding of the Chinese consumer.
- Brand perception is paramount. Investors need to ask what damage has been done to the brand by price discounting.
Comments
It is hard to overstate the importance of brand perception in China, particularly in regard to children’s food and health. The whole reason Australian companies were able to gain a foot hold into the Chinese market came from safety concerns surrounding local products. This perceived safety was the driving reason behind a2 Milk and Bellamy’s being sort after by “diagou” shoppers in Australia with the Chinese market valuing premium quality (even if just perceived) over price . (see here)
To this end my greatest concern is what damage has been done by Bellamy’s engaging in price discounting, which is rare for a premium brand in China. In my opinion this may indicate a failure by Bellamys to understand its position within the market or the importance that the premium tag carries.
Tips for new investors
Understanding what a company does is only part of the puzzle. You also need to understand where the company fits in the market and what are the key drivers to its success. Regulatory changes are also important to consider and how a company adapts to such changes reflects directly on the quality of the management.
Update:
The Australian Financial Review has spoken to “diagou” shoppers you can read their thoughts here.
Disclosure:
Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.