Buyers building something big is coming, page-2

• Article just out on Bloomberg - may strike a bit of fear in A2M. The last paragraph is a bit of a concern. Maybe an opportunity for A2M??

• Bears target Bellamy's, Blackmores after valuations surge
• China's craving for Australian brands helps shares rocket

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Donna Zhang trawls Sydney shopping arcades buying baby formula, vitamins and health supplements for a friend in Beijing, where demand for products made by Bellamy’s Australia Ltd. and Blackmores Ltd. is insatiable. She’s not the only one stalking these suppliers.
After their stock prices surged more than 500 percent last year, hedge funds are now targeting the two companies, betting China’s love affair with brands from Down Under will become unsustainable. Wagers on share-price declines by Bellamy’s and Blackmores have climbed to a record and are about double the market average.
“Certainly on a valuation basis they do look very stretched,” said Ben Le Brun, a market analyst at OptionsXpress Australia Pty Ltd., a unit of Charles Schwab Corp., which trades futures and options. “Whether all this optimism is achievable and whether management can take advantage of this insatiable demand for their products from China is what the short sellers are questioning at the moment.”
Blackmores and Bellamy’s are both down more than 20 percent this year amid the short selling and concern of increasing competition in the Chinese market.
Bulls say demand from China’s expanding middle class for products from coconut water to baby formula will continue to boost returns. Bellamy’s Chief Executive Officer Laura McBain expects continued flow of her products into China via Australian retailers as well as expanding online sales and revenue from partnerships with Chinese supermarkets.
“Demand for our products in China remains strong,” McBain said last month in a letterto investors.
Some Chinese place greater trust in products bought overseas after a series of scandals around food safety, including an episode of melamine poisoning in 2008 that killed at least six infants and left thousands more sick. In a boon for China’s $20 billion market for infant formula, the country’s long-standing one-child policy, which was introduced more than 30 years ago, was scrapped last year to allow families to have two children.
“They can’t get enough of this stuff,” said Zhang, 44, a Chinese national who has lived in Australia since 2003. “It’s also cheaper in Australia and you know they’re the real thing.”
The lucrative practice of mainland Chinese buying supplies in Australia and shipping them home is forcing Australia’s biggest supermarket operators to limit purchases. In the eastern Sydney suburb where Zhang was shopping, Australia’s two largest supermarkets both had signs explaining to customers that purchases were restricted due to supply problems, written in both English and Mandarin.
“Chinese demand for premium-branded ‘clean and green’ products from Australia remains in its infancy,” said Jonathan Collett, a research analyst at Ord Minnett Ltd., a brokerage, in Melbourne. This is “underpinning a seismic shift in the growth outlook for companies such as Blackmores.”
Blackmores listed its shares in 1985 and has spent three decades developing a range of products from osteoarthritis pain relief to nutrition supplements and skin cream. It estimates China accounts for 40 percent of sales.
Bellamy’s, which sold shares in its initial public offering in 2014, markets organic baby formula, toddler milk drinks and food pouches for infants. The stock is up more than 900 percent since the IPO.
“Bellamy’s worries us quite a lot,” said John Campbell, a fund manager at Avoca Investment Management in Sydney. “There’s obviously valuation issues, but what really concerns us is that they’re only manufacturing one product, there’s no broad-based business. It would be pretty easy to replicate, and it concerns us that the business is very vulnerable.”
Short interest climbed to 5.76 percent of outstanding Bellamy’s shares this month, a record, Markit data compiled by Bloomberg show. Blackmores short interest advanced to a record 8.8 percent on March 10. That compares with an average of 3.1 percent for Australian-listed shares with a market capitalization greater than A$1 billion.
Spokeswomen for both companies declined to comment.
Analysts remain bullish. Of the researchers covering the two companies, none advise selling the shares.
Still, Julian Beaumont, who helps oversee A$6.5 billion ($4.9 billion) as a Sydney-based portfolio manager at Bennelong Funds Management, has his doubts.
“They look expensive,” he said. “Their strength has been surprising, as has the extent to which exports into the Chinese market have grown and promised so much going forward. They are on fairly ritzy multiples. You have to be very careful.”
Bellamy’s shares are down 23 percent this year, after surging 725 percent in 2015. Blackmores, which has lost 21 percent in 2016, almost tripled its dividend last month and reported a 160 percent surge in profit in the first half of the year. The company’s stock jumped 519 percent last year, making it the best performer on Australia’s benchmark S&P/ASX 200 Index.
Sliding Blackmores shares this year dragged valuations down from about 38 times estimated earnings to 30, data compiled by Bloomberg show. Bellamy’s trades for about 28 times projected profit, down from 51 at the end of last year. Rival Danone, which makes Aptamil baby formula, trades in Europe for 20 times earnings and Glanbia Plc, a competitor to Blackmores, carries a multiple of 21 on its London-listed shares.
Blackmores shares rose 1.4 percent and Bellamy’s lost 1.5 percent as of 11:53 a.m. in Sydney, while Australia’s benchmark S&P/ASX 200 Index added 0.2 percent.
“The shares are pricing in a number of future upgrades in the short term,” said OptionsXpress’s Le Brun. “There’s the potential for regulatory changes in China and events coming out of left field. If some untoward news comes out or some uncertainties appear on the horizon, then we’re going to see a sharp turnaround given the valuations they trade at.”