The shifting shoals of the Chinese market has caught out Bega Cheese which is forecasting flat earnings in the year ahead while warning it will be forced to make a large provision against its infant formula joint venture with Blackmores.
In response, investors dumped its shares, which shed a heavy 17 per cent to close at $5.40 Tuesday, near the day's low of $5.20.
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Meet the personal shoppers buying for China
'Grey market' exports of vitamins and baby formula to China brought in $1.3b in revenue last year.
Bega Cheese's woes spilled over to related specialty food stocks with Bellamy's, which also makes some infant foods, down 2.8 per cent at $12.90 as A2 Milk shed 2.5 per cent to finish at $1.95c.
A2 Milk generates around a third of its revenues from an infant formula product, A2 Platinum, with investor concerns it may be facing similar competitive pressures to the Bega Cheese/Blackmores venture.
As the company battles what it calls the "super down cycle" in the dairy sector against the backdrop of a global glut, a push into the infant formula sector via a joint venture with Blackmores is also taking on water due to regulation changes in China, coupled with discounting.
"The combination of a regulation change in China, a supply response to the demand signals and the evolution of supply channels to market now sees significant discounting ... and signs of short term oversupply," Bega's chairman, Barry Irvin, told shareholders at Tuesday's annual meeting.
The present supply glut is a reverse of the situation just 12 months ago when "supermarket shelves were empty and customers in Australia and internationally were providing ever increasing orders", shareholders were told.
But with the recent changes "our expected sales [did] not materialise at levels that were initially forecast [with] some headwinds for the partnership particularly in the Australian market".
Trading in its dairy markets will see earnings mark time this financial year, it said, but the downside is a provision of up to $7 million against its share of the inventory held in the partnership with Blackmores.
The write-off of Bega Cheese's exposure to the venture comes less than a year after it was formed, with the initial product launch only taking place earlier this year.
The venture launched its initial product into pharmacies in January, followed by selling through supermarket chains in April.
When briefing analysts in August about its annual earnings, Bega Cheese pointed to a change in market conditions for the new venture, re-inforcing the view that the focus was more the China - and Asian - markets rather than Australia.
However the severe deterioration in the venture's fortunes in only a matter of weeks has caught investors offguard. In the period since start up until JUne, it lost $814,000, indicating annualised losses of $1.6 million.
Bega Cheese had won support from analysts and investors as a "company transitioning from what is largely a commodity and contract manufacturing revenue base ... towards a consumer facing higher value product mix", Bell Potter put it in a client note earlier this year.
But that transition may be occurring along with some missteps.