- We believe recent regulatory activity suggests assessment rates for China infant
formula registrations are returning to pre-merger levels. In our view, this increases
the likelihood of Bellamy's (BAL) receiving CFDA approval in 1H19 and provides a potential
positive near-term catalyst not captured in the stock’s current price.
- With a favourable risk/reward return profile, we upgrade to an Add rating and set a new share price target (Morgans clients only). Only suitable for investors with a high risk tolerance.
Sell off creates opportunity; SAMR appears back to business
BAL’s share price has fallen ~60% from its March high. We attribute the severe
weakness primarily to its delay in receiving SAMR registration for its China labelled
infant formula products (previously referred to as 'CFDA registration’). We believe the
delay in SAMR approval is due to the merger of China’s CFDA, AQSIQ and SAIC
functions into a single regulatory body (SAMR) during 1HCY18.
The merger created
delays in processing applications and no approvals were announced for over three months.
However, we believe there is sufficient evidence to indicate the SAMR is returning to its
pre-merger assessment rates (1-2 rounds of approvals per week).
It announced a new
round of approvals on 14 August and released its "3 stipulations scheme" outlining the
new body’s organisational structure and functions. We believe these developments
increase the likelihood of BAL receiving SAMR approval in 1H19.
Highlighting the risks
Our positive investment view on BAL is only suitable for investors with a high risk
tolerance. We detail potential negative catalysts in greater detail in this note. Clearly, the
greatest risk to our view is that BAL does not receive SAMR approval at all or it is
received in CY19 and the proposed CBEC regulatory changes (requiring SAMR) are
Given the brand's strong appeal to Chinese consumers, we continue to expect
BAL will receive SAMR approval. With indications the SAMR assessment rates will
increase, we believe the potential upside rewards of approval outweigh downside risks.
We revise our forecasts
We have revised our FY18/19/20 NPAT forecasts by 7.2%/18.0%/20.0%. Our FY18
revision reflects a more conservative 2H18 GP margin. In FY19, we have removed our
entire full year estimate of BAL’s China labelled MBS sales and the revisions to FY20
are largely due to a re-basing of our forecasts.
We believe FY19 earnings growth will be
underpinned from a full-year benefit of lower ingredient costs (expansion in GP margins)
and market share gains. FY20 should benefit from an expansion into China MBS and
Camperdown achieving profitability. Over time, we see scope for BAL to implement price
rises, expand its product range and enter new geographies.
There is still much to like about BAL. Its delay in receiving SAMR approval has afforded
investors the opportunity to acquire a company with a premium brand (point of
differentiation), operating in a growing, high-margin category which enjoys an
established domestic presence and strong brand awareness among Chinese
These are qualities its emerging FMCG peers have found difficult to
replicate. With the stock oversold and evidence China’s SAMR is back to business, we
believe the potential rewards from near-term catalysts outweigh the outlined downside
risks. We upgrade to an Add rating with a new price target (Morgans clients only).
Morgans clients can login to view our detailed report and share price target for Bellamy's Australia (BAL). Alternatively, please contact your nearest Morgans office for access.
Disclaimer(s): Analyst owns shares.
The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.