What's next?

Hi all,

I've been following BAL for the last couple months as one of my mates kept on nudging me to buy this stock. I did some research and thought this was a bit too risky for me given the high expectations & valuations. Plus there wasn't any convincing price action to buy into.

I finally bought a small parcel in the low $7s as it fell into the support zone. (see attached chart)



As I'm a shareholder now, I'd like to share my thoughts on Bellamy's.

First, fundamentally the company is fairly valued after today's fall. It's got a good product and a good reputation among customers. I have friends who are big Daigouers and they spoke highly of the Bellamy's brand.

I travel to China often and from my own experience I can tell that the infant formula segment has lots of dodgy producers. When I'm in China, I tend to shop at high end supermarkets but even there the milk powders are of questionable quality. Nice packaging, but if you read the fine prints, you would put them back. So if Bellamy's can establish decent distribution network, there's a lot of potential.

Based on what I've read, the new regulations are good for quality producers such as Bellamy's in the long run. The current arrangement will cease by the end of next year, so all those dodgy producers are dumping low quality (often fake) milk powder to squeeze the last dollar out of this trade. So this setback seems to be temporary from this perspective. But it falls on the management team to make sure that they can meet the challenges in a changing environment.

Secondly, I think the board and senior management need to be held accountable. My other mate who's made a killing in A2 told me that BAL is really bad at communication and he's 100% validated today.

This article appeared in the AFR today: http://www.copyright link/brand/bos...he-baby-formula-wave-in-china-20161115-gspzyh



Just looking at the faces of these two women doesn't give me much confidence. I don't want to sound like a sexist, but I think the CEO's capabilities no longer match the scale of operations of Bellamy's after the company has gone through such a tremendous growth period off the tailwind of Chinese demand.

Frankly, male CEOs are more likely to succeed in China because men can drink ... a lot... I doubt very much that Ms McBain can have a good time drinking rice liquor with Chinese businessmen at dinner tables where most deals are made.

While they have set up a local office in China, the senior management team over in Tasmania still severely lacks people who understand the Chinese market and how to do business in China. Seriously, when Chinese are your most important customers, you must hire more people that can connect with the Chinese. A lot of Australian companies fail because they don't hire enough Chinese talent.

Take a look at the management team and you'll find a severe lack of diversity: http://investors.bellamysorganic.com.au/board

Thirdly, here are my suggestions:

1. Expand the management team to include more people who understand business in China.
2. Improve corporate communication to avoid another embarrassment like today, perhaps hire an ex-investment banker.
3. Aggressive marketing in 2017 to expand market share. Since revenue would be lower than this year, you might just go balls to the wall and fight tooth and nail for customer loyalty.
4. Think about Asian customers in product design, i.e. adding Asian flavors.
5. Put Asian baby faces on your packaging!
6. Bellamy's Chinese website sucks! Redesign and fix it!
7. Build partnerships with Chinese dairy companies. Do a equity swap of some sort with one of the industry giants. If Bellamy's can strike a deal with Yili, Mengniu or Guangming, it'll easily send the SP back above $12.

To do well in China, it's imperative to have a local partner. They'll offer invaluable access to distribution networks and more importantly, shield from changes in government policies. Bellamy's is in a good position right now but it can change very quickly. For the long term success of the company in China, you must team up with local businesses. I know it sounds great to be 100% Aussie owned and dominate in Chinese market, but the truth is the Chinese won't like it nor would they allow it in the long run.

Finally, I really hope Bellamy's and other Aussie companies can succeed in China. If board select the right people and management implement the right strategies, I think the future is very good for Aussie IMF producers.

Have a good weekend all.