This Friday morning, the new announcement from Bellamy broke their super star legend. It predicted the first half of FY17 will be A$120million. Meanwhile, it predicted the second half of FY17 will remain the same as the first half. FY17 gross revenue will be lower than FY16’s (A$ 245 million). At the end of Friday, Bellamy dropped over 43% with volume a of 24million worth of shares and over 25% turnover rate.
Now we can have a look the reasons. Bellamy blamed the dropping of revenue with new the regulation of China. However, it did not mention which policy exactly of the new regulation. As the main competitor of Bellamy, A2 Milk is facing the same market fluctuations, new regulations and marketing methods.But the first four months revenue of A2 has doubled compare with the same period of last year.
And The Chinese Government has announced extend the grace period to the end of 2017 for Cross Bord Ecommerce at this November.
The reason the two similar products with very different stories ispossibly because some policies from the new regulation only effect Bellamy in a negative way.
Please see the article I wrote two months ago.
https://hotcopper.com.au/threads/a2-vs-bal-which-one-is-better-part1.3090407/#.WEPDYfkQilc
It compared the two companies baby fomular supplying chain system.
The China CFDA infant formula registration published at 1st October 2016.It require every factory can only produce no more than 3 different brands and 9 kinds of baby formula.
Tatura,partner of Bellamy under Bega Cheese, is the only certified organic baby formula factory to meet the regulation of the Certification and Accreditation Administration of China(CAAC).
But now Tatura run full production with the baby formula.There is no more producing capacity to satisfy the higher demanding of the market.
To solve this problem, Bellamy signed another producing agreement with Fonterra in December 2015. Darnum, as the branch company of Fonterra, helps Bellamy to produce baby formula. ( Darnum is controlled by a Chinese company called Beienmei. It occupies 51% and Fonterra occupies 49%) Until now, Darnum was not only certified under the Certification and Accreditation Administration of China(CAAC),but also dont get certified organic baby formula permit for CAAC
(We can see VIP PLUS DAIRY has banned by CAAC at this November)
Even if Darum got the cetificate and can help the Bellamy produce the formula.Bellamy will working with two different production factories. if Bellamy’s producing volume could not stand at the top 3 clients of Darnum their agreement will be hard to continue.
In my Opinion,the biggest risk for Bellamy is not from China,Its from production capacity.The production capacity for Tatura has reached top floor.If they cant produce more that means the revenue for Bellamy will stop at $240 million in the next two years.
Bellamy announced the revenue up 24% year to 20November compare same period last year.This result looks still good.But in fact Bellamy rised the factory gate price nearly 30% at last November.
Raise 30% price just get uo 24% revenue,that's means if your calculate tins quantities,the sales of bellamy formula have a small decline.
Sales compare the same period at last year get zero growth for a medium sized market value of company is a disater.
For the single day sale, i got same result from Alibab Big Data.
Compare with 2015 Single Day,Bellamy rose just one position.At 2015,Bellamy ranked 20th, 2016 bellamy ranked 19th.
But A2 get better result
A2 ranked 13th in single day at 2016.
At 2015 single day,A2 ranked just 21th.
This is very strange Bellamy Sales 0% growth in the recent years,especially China have canceled one child policy and another brand A2 can still get big growth in this situation.I guess there are maybe 2 reasons cause this problem.
First is Bellamy rised the factory gate price nearly 30% at last November.That cause some daigou and customer in China switchBellamy to A2 Aptamil and other brand.
The Alibab Big Data also show this tendency.(full line is A2,dot line is Bellamy)
Another reason is think is more compete from China's organic brand and Europe's organic brand.
So last question is Bellamy still have worth to investment at $6 per share?
As longterm investment view,Bellamy can get $240million revenue per year and have nealy 35- 40million net profit.For net profit rate,that's very good. But consider BAL just a medium sized market value of company,the most important thing is not net profit rate,It is growth potential.
Growth potential is the most imporatant for every small and medium sized market value of company.Next year is better than this year then u can get high PE.
I suppose,Darum can get the certificate from CAAC and can help Bellamy produce more formula so that Bellamy can through price war gain some market share.Net profit$35million- $40million and 18-25PE. Market value can get 800million and share price about $8
But if Darum still cant get organic permit from CAAC,only Tatura help Bellamy.dont have Growth potential,
Net profit $35million- $40million and 10-15PE,market value is 400million -600million is reasonable,share price is $4-6
(I heard some news which cant confirm Darum have already help Bellamy produce baby fomula.The formula produced by Darum sell in Australia market and formula produced by Tatura sell to China to avoid China's policy regulation.If this information is true,this is very dangerous behaviors for Bal. Every small mistake will casuse all product ban from China,Espcially now the China's government now is supporting china's local brand to avoid big baby formula market controled by oversea brand.)
