Bellamy's Australia Ltd

BAL Details
· Temporary volume hurdles owing to China’s regulatory changeover: Bellamy's Australia Ltd (ASX: BAL) stock crashed over 43.53% on December 02, 2016 as the group reported that they would face pressure in their volumes till regulatory registrations are completed in China. Brands which are not able to get registration are liquidating their inventory at cheap prices in China and consequently imported brands like Bellamy’s would face pressure.

· Strengthening Supply Chain to enhance infant formula volume: The management views this volumes pressure as a temporary hurdle and established brands like Bellamy’s would see benefits on a long-term basis. The group has been restructuring their sales channels into China since the regulatory announcements and building a stronger, efficient routes-to-market which would drive demand post the regulatory change over. With the growing preference of quality products by Chinese, Bellamy’s premium organic offering is well positioned for this segment. BAL forecasts to derive supply chain initiatives from first quarter of 2017, which would lead to stable and regular ordering patterns. BAL infused further $15-20 million as compared to the FY16 spend for marketing to derive benefits on long-term basis. The group forecasts a weak EBIT margin, which is expected to fall below 20%, and estimates their first half of 2017 revenues to be over $120 million and expects a similar second half revenue. BAL forecasts to see their China’s distribution expansion efforts from late 2HFY17.

· Recommendation: Given the current scenario, we give a “Hold” recommendation at the current price of – $ 6.85

a2 Milk Company Ltd

A2M Details
· Peer-driven concerns from China dragged the stock lower: a2 Milk Company Ltd (Australia) (ASX: A2M) stock also fell over 10.16% after the group’s peer Bellamy’s gave a weak update on performance in China owing to regulatory changes. But this fall seems to be a temporary momentum given the growing demand for Healthier options in China, and given the benefits of A2 protein, the group’s products are well positioned to leverage the opportunity. Further, A2M had recently delivered a positive trading update with 4MFY17 group EBITDA/Sales growth of 22.9%.

· Recommendation: A2M stock rose over 69.1% (as of December 01, 2016) in the last six months. We give a “Hold” recommendation on the stock at the current price of – $ 2.21


Diversified portfolio (Source: Company Reports)

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