The share price of Australian infant formula company Bellamy’s Australia Ltd [ASX:BAL] has dropped by nearly 5% in this morning’s trade, after a broker note out of Goldman Sachs slashed its price target by a whopping 18%.
The broker has suspected that the company’s China Food and Drug Administration (CFDA) accreditation will undergo significant delays. Analysts have retained and remain optimistic about it’s long-term growth, but Goldman’s lowering of the price target from $25.70 to $21.00 may have scared away some investors.
Why would the CFDA approval be delayed?
Bellamy’s has reformulated one of its flagship products and is currently in the process of submitting an application for its approval. The broker is assuming that this may cause some complications and is foreseeing a delay of several months.
In addition to this, trade delays between Australia and China are likely to be exacerbated by recent political developments between the two national governments. It doesn’t help to ease tensions, of course, when we consider that nearly one-third of the Australian goods and services trade is connected to China.
That’s a lot of dependence on a single market.
CFDA approval is one of the shiniest milestones of entry into the Chinese economy. It’s required to sell any Chinese labelled products within China.
The market will be anxious should the broker’s prediction come true and Bellamy’s CFDA approval is delayed. This could cause the Tasmanian-owned company’s sales volume to drop significantly for FY19.
What’s next for Bellamy’s?
The infant formula niche seems to be a hotspot for competition lately, with heavyweights like The a2 Milk Company Ltd [ASX:A2M] and Wattle Health Australia Ltd [ASX:WHA] also taking centre stage in the fight for Chinese popularity.
If the China market develops loyalty to one brand first before the others, it may be difficult for another one to break in and compete. That’s why a delay could spell out more disaster than just lower sales.
But Bellamy’s focus on organic food and formula products for babies is likely to be a huge hit in increasingly health-conscious China. This morning’s dip in the share price seems to merely be a response to the note from Goldman Sachs.
The shares are expensive, but its growth profile is still looking positive. This could be a wise decision for investors willing to take short-term pain for long-term gain.
For Money Morning
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