Shares of Bellamy's Australia Ltd (ASX: BAL) have surged more than 5% higher today, rising above $11 per share after falling as low as $10.34 during yesterday's broad sell-off.
After a tremendous rally in 2015, shares of Bellamy's and other infant formula producers have been hammered so far this year. While some of that may be due to profit taking, it seems a lot can be blamed on tougher regulations being introduced in China, which some investors fear may hinder growth in the region. Despite today's gains, Bellamy's shares are still trading 33% below their $16.50 peak in December.
However, an announcement from Bellamy's rival a2 Milk Company Ltd (Australia) (ASX: A2M) this morning may have helped ease some of those concerns.
Despite the numerous changes to the infant formula regulatory environment in China, a2 Milk says it still considers itself well placed to respond to those changes as well as any changes that may be introduced in the future.
You can read more about the update here. a2 Milk upgraded its earnings guidance, suggesting operating EBITDA will be in the range of $52 million to $54 million for the full-year. The mid-point of the revised guidance represents a 12.8% increase on previous guidance ($45 million to $49 million), with full-year revenue also revised upwards.
For the record, EBITDA refers to earnings before interest, taxes, depreication or amortisation are accounted for.
The update from a2 Milk Company also bodes well for Bellamy's, which also counts China as a key growth region. Although these companies' products may be more expensive than other China-produced infant formula products, they are perceived as being safer for infants to consume following a number of health hazards involved in locally produced goods in the past. As such, many residents are happy to pay the premium.
There are certainly risks facing the infant formula producers, although they also may have been overdone. Indeed, some of the regulations being introduced could even help Bellamy's and a2 Milk in the long run by ensuring more of their products are sold in the traditional market (which comes with higher margins than in the so-called 'grey market'), while tougher regulations could also block smaller producers from selling their products in the market. Assuming Bellamy's and a2 Milk can get the proper authority to sell their own, that would be a win for the pair as well.
Although shares across the sector are not cheap, per se, they are certainly worth a closer look for investors who are committed to holding on for the long-term. Particularly with China's controversial 'one-child policy' being lifted, there could still be plenty of growth left in Bellamy's.
