Blackmores CEO Christine Holgate. Pic: David Geraghty
Blackmores is set to increase its Chinese presence, according to Credit Suisse, which says concerns about new regulations were overdone and that the vitamins giant is the stock to buy.
Credit Suisse analyst Ben Levin said there was a new opportunity emerging in what the investment bank expected to be a $US10 billion China vitamins and dietary supplements market through the bricks and mortar retail channel by 2020.
“We believe Blackmores could capture $US150 million, adding 80 per cent to its existing China sales base as new regulations assist Blackmores in tapping this large market,” he said in a client note.
Credit Suisse initiated coverage of Australian-listed Blackmores (BKL) with a $175 price target, which added support to the stock today, pushing it to close 7.43 per cent higher at $146.
Mr Levin said Blackmores’ exports to China should continue to grow despite concerns about tightening regulation around imports via the cross-border e-commerce channel.
In April Chinese regulators released a “positive list” of commodities that could be imported through the cross-border, e-commerce channel, which created confusion and investor fear about the impact on Blackmores’ Chinese sales.
Credit Suisse said the hit to Blackmores’ share price following news of the “positive list” was overdone and that the impact on Blackmores was not as great as the share price move suggested.
“We estimate only 25 per cent of Blackmores’ China sales are via cross-border e-commerce,” Mr Levin said.
“Blackmores’ daigou channel — Australian based selling agents using China personal post — accounts for 70 per cent of Blackmores’ China revenue. We observe through industry contacts that this channel has been far less affected and not explicitly covered by the new China regulatory announcement.”
Credit Suisse added that the 33 per cent share price correction since April presented an attractive buying opportunity.
The investment bank also highlighted that Blackmores could generate the highest return on equity, of around 60 per cent, among companies in the ASX 200.
“By our calculation, Blackmores’ share price is implying either no further growth in the ecommerce and daigou channels or no material development of the China retail business,” Mr Levin said.
“However, we believe all channels will remain growth avenues for Blackmores.”
The analyst also said that during a recent trip to China, industry participants widely acknowledged Blackmores’ potential to succeed, citing high brand awareness and a perception of high quality.
“Blackmores is adding resources to exploit the China retail market faster than many of its peers. It has established a local, wholly-owned subsidiary, secured a few key distribution relationships, and may double its local headcount from 30 to 60 people,” he said.
BKL Price at posting:
$146.00 Sentiment: Buy Disclosure: Held
