Bellamy's shares hit as fresh China roadblock emerges
Only a matter of months after Jan Cameron took control of Bellamy's Australia, the company has run into roadblocks in the key China market, warning that it faces a loss of sales which will result in earnings taking a hit from the start of 2018.
China is forcing suppliers of infant formula products to register with the authorities and obtain authorisation before they can sell within the country. The change has come as part of moves to limit each supplier to selling just three formula milk brands with each product to undergo testing and licensing.
The news comes months after Kathmandu co-founder Jan Cameron took control of Bellamy's Australia. Credit:Erin Jonasson
The move is aimed at limiting the number of infant formula product being sold in China as well as ensuring the quality of the products hitting shop shelves.
Following its purchase of Vegemite from Kraft Foods for $486 million earlier this year, Bega Cheese decided to sell its Derrimut plant to Mead Johnson, the giant US formula business. The Derrimut plant used to supply Bellamy's but its new owners have decided not to continue with the arrangement.
With the stricter China registration requirements now being introduced, Bellamy's has to reapply for approvals once it has a new supplier lined up, a process that will take several months at least, Bellamy's told the ASX on Thursday.
Investors took the news badly sending the company's shares down 8.28 per cent to $4.10 at the close, up from the low of $4.05.
"From January 1, 2018, the People's Republic of China will require the infant formula products of the company that are manufactured for sale in [the] PRC to be registered," it said. "Bellamy's... PRC products can no longer be registered at Bega's Derrimut canning line."
Bellamy's said it expects to eventually receive approvals to sell its infant formula product in China once it has finalised negotiations for alternative suppliers, but there will be a lengthy registration and testing regime which will take up to six months to conclude. The testing procedure alone is expedted to take as long as six months, after which it can lodge its application for sales authorisation which will take a further unspecified period.
In February, Bega sold its infant formula finishing plant at Derrimut to Mead as part of a $200 million deal.
In the December half, Bellamy's sold infant formula products in China worth $16 million, which was equal to 14 per cent of total revenues.
A spokesman for the company confirmed it is reviewing the likely impact on earnings, although the impact may be limited as "Bellamy's is actively pursuing strategies to mitigate the extent of any interruptions" to its sales in China, he said.
"Bellamy's can still keeping selling Chinese label product into bricks and mortar [outlets] until January 1, 2018," Morgans Financial analyst Belinda Moore said in a note to clients. "It is important to note that bricks and mortar is one channel to market for Bellamy's in China.
"Its main sales channels are currently Australian labelled product sales through the daigous into China and e-commerce sales through the Free Trade Zones. Chinese consumers are increasingly buying foreign product through e-commerce channels as their preferred option. They also prefer the English label product from Australia (as opposed to the Chinese label product)."
There are an estimated eight canners which could handle the Bellamy's business, which is large enough to be attractive for most operators, Ms Moore said. She has a 'hold' recommendation on the company's shares with a $4.75 price target.
Ms Cameron was behind a board spill at Bellamy's which followed a series of senior management at the company after its sales channels into China were disrupted.
Industry sources also speculated that Blackmores could also be affected by the changes at the Derrimut plant, although the company is yet to respond to questions on the matter. Its shares were down 2 per cent at $113.18.
Analysts said the Blackmores' infant formula business is only a "very small part of the whole".
"This business has failed to gain traction, and the company said as much late last year," one analyst said. "It is not as material for Blackmores as it is for Bellamy's."
More recently, Reckitt Benckiser Group said it is negotiating to buy Mead for as much as $US16.7 billion.