The Bellamy's Australia Ltd (ASX: BAL) and a2 Milk Company Ltd (ASX: A2M) share prices are both down around 0.7% today, despite the benchmark S&P/ ASX200 (ASX: XJO) index lifting 0.5% higher on the back of renewed hopes the US and China may eventually remove trade tariffs.
Both Bellamy's and a2 Milk are reliant on growing China sales to justify their current valuations, but according to a report in The Australian today a research analyst at Citi has warned that China may again change the rules and requirements for overseas sellers of infant formula.
Changing regulation in China is a key risk for any overseas business as it's a one-party state with no real rule of law that companies can rely on to enforce contracts for example. As such a cynic may say it's possible rules are changed to protect home sellers of baby formulas that some party members have a financial interest in over foreign companies.
Notably, a2 Milk does have some Chinese investor interest via its holding in China-backed Synlait Milk Ltd (ASX: SM1), but Bellamy's has faced the most registration delays in China and has immaterial Chinese financial ownership if any.
Clearly, the Chinese regulatory environment is complicated by politics and poses a risk to these companies as a double-edged sword, although some argue China in fact wants to show the world it's determined to open up its markets freely to foreign entrants.
How you stand on the risks is likely to shape your opinion on the quality of these companies as investment opportunities.
