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Beware hot stocks ... they can burn

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Beware hot stocks ... they can burn.

Shares of Bellamy's Australia have been crunched, down 43% within minutes of the ASX's open last Friday (2 Dec 2016). As one of Australia's premier producers of infant formula to the large markets of Asia, Bellamy's announced a downgrade to its Chinese ambitions as a result of "temporary volume dislocation due to regulatory changeover."

Bellamy's has enjoyed a tremendous run-up in share price over the past 24 months, along with a2 Milk Company, as both companies sought to satisfy the insatiable thirst of China's middle class parents for quality infant formula.

But while Bellamy's says the Chinese opportunity remains "vast", regulatory concerns could put a ceiling on that blue sky potential.

Specifically, Bellamy's said that the recent measures put in place by Chinese authorities have forced a huge amount of supply into the market by competitors who are unlikely to meet the tougher regulatory requirements. "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."

Investors holding Bellamy's shares would be bitterly disappointed by Friday's news.

The price of Fisher Funds' portfolio holding, Mead Johnson, did not react to Bellamy's announcement. While it also operates in the Chinese infant formula market, it is geographically diversified with China accounting for around 40% of profit historically. Mead is less exposed to the 'grey channel' and is focused more on the premium/super-premium end of the market.

 

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