Watch out below! The a2 Milk Company Ltd (Australia) (ASX: A2M) share price plummeted more than 11% today as fears over Chinese regulation took its toll on investor sentiment.
The catalyst for the share price fall was not a statement made by a2 Milk, but rather one from its rival, Bellamy's Australia Ltd (ASX: BAL). As shown by the red line in the chart above, the Bellamy's Australia share price tumbled as much as 43% this morning.
The key statement made by Bellamy's regarding the Chinese market environment read as follows:
"Bellamy's will continue to experience temporary volume dislocation until regulatory registrations are completed in China. Brands that are unlikely to gain registration are liquidating inventory at discounted prices, which impacts both imported brands such as Bellamy's and the market overall."
As a result, Bellamy's said it expects revenue for its 2017 financial year to come in flat, when compared to its 2016 result. To put that in perspective, Bellamy's reported 95% revenue growth in the year to 30 June 2016 — as Chinese revenue soared more than 300%.
The strategies pursued in China by Bellamy's and a2 Milk are different so the fate of one business may be somewhat independent of the other. However, it remains to be seen if a2 Milk's ultra premium brand has enough power to stave off the flood in market supply.
Foolish takeaway
Shares of a2 Milk have been volatile over the past 12 months, yet its price is up around 110%.
I think it is likely we will see an announcement by a2 Milk in the near future, given the gravity of the fall in its key competitor's share price. Indeed, it remains to be seen how the current conditions will impact a2 Milk's near-term sales forecasts.
Until we get some clarity, shareholders should expect more share price volatility as the market comes to grips with the announcement. However, I believe it is too soon to make a decision to either buy or sell a2 Milk or Bellamy's shares.
