Bellamy’s announced a sharp decline in full year profits this year (Credit: Natonic)

Bellamy’s announced disappointing full year results this year, with full year earnings declining 49.8% to $21.7m on the back of a challenging business backdrop in China. Revenue declined 21.6% on the previous year and the company needed to contend with substantial margin compression and the loss of $18m in China label sales. The gross margin improved, but the net margin was impacted by doubling marketing spend to 10.6% of revenue and a general rise in smaller costs (reported as “other expenses”). One positive in the results however is the company announcing 10-15% net revenue growth at a consistent EBITDA margin, an outlook which signals that management believes that the worst is over for Bellamy’s. Nevertheless, with the company worth $912m and only earning $21.7m this year, it remains to be seen whether this will be enough to appease investors.

Bellamy’s can no longer advertise infant formula in the 0-12-month-old market segment, and China is set to favour domestic producers which it wants to obtain a 60% market share. Companies can be directly exposed to the Chinese growth story through either the daigou channel or direct business relationships. The daigou channel has been hit in recent times, with China now requiring people operating daigou businesses to acquire licences to operate daigou businesses in both China and the other country the operate in, meaning those companies are subject to the same taxation as normal businesses. This has hurt Australian businesses reliant on the daigou channel, since it increases the average effective rate of tax consumers in China pay on their goods, pricing some consumers out of the market.

This has also resulted in particularly bad effects for A2 Milk (ASX: A2M), Bubs Australia (ASX: BUB) and Blackmores (ASX: BKL). A2 Milk (ASX: A2M) sold off earlier this year, as China ratcheted up regulations on the importation and advertising of foreign infant formula. For most of the milk producers, the adverse regulatory changes have been priced in. Nevertheless, stocks have still sold off as investors got increased clarity around the financial impact of the regulatory changes this reporting season.

 

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August 28, 2019