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Why you needn’t worry about your Bellamy’s Australia Ltd shares

The CEO of Bellamy’s Australia Ltd (ASX: BAL) has moved to reassure investors who have grown concerned about the impact a Chinese tax will have on the demand for its products.

Bellamy’s produces a range of high-quality organic food and formula products for infants. Like others in the industry, including a2 Milk Company Ltd (Australia) (ASX: A2M), Bellamy’s has experienced a huge increase in demand from China, whereby residents often trust the quality of products produced by western countries over those that are home-grown.

However, the country is introducing a new law this week under which goods bought via foreign websites will attract a tax of 11.9%, thus increasing the prices of those products. As a result, investors are fearful that demand for Bellamy’s products in the region will diminish with customers not prepared to pay that higher price – a fear reflected, in part, by the 25.6% decline in the group’s share price year-to-date.

Firstly, it should be noted that the new law won’t apply to products sold on the grey market, which are believed to make up a considerable portion of Bellamy’s sales. These are the transactions whereby the product is first purchased in Australia, and then sold to recipients in China.

Speaking to The Australian Financial Review, Bellamy’s CEO Laura McBain also noted that the laws would not impact the group’s legitimate e-commerce business, either. She was quoted as saying (my emphasis), “It won’t have an impact on the demand for Bellamy’s going forward.”

Part of her reasoning was due to a 10% parcels tax that will also be scrapped in Beijing at the same time. This tax was applied to goods valued at more than 500 Chinese yuan, or roughly $100. Basically what that means is there is a very small increase in price for customers who were spending more than $100 on Bellamy’s products in any one transaction, which likely describes the buying habits of many individuals.

Now, an increase in price isn’t great for the business, considering the additional amount will go to the Chinese government rather than Bellamy’s. However, it is important to remember that consumers are already happy to pay considerably more for Bellamy’s products than for China-made products, so it seems unlikely that another small increase will have a huge impact.

Foolish takeaway

Compared to their stunning performance in 2015, shares of Bellamy’s have been hit with a sledgehammer so far in 2016 and some investors are likely getting anxious. The same could also be said for shareholders of both a2 Milk and Blackmores Limited (ASX: BKL).

However, while Bellamy’s shares still aren’t cheap, they are trading at a more attractive level than they were in December. Demand is still likely to grow strongly over the coming years, as are earnings, so it could be well worth your while keeping an eye on the business – particularly if its shares do fall any further in price.

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Motley Fool contributor Ryan Newman owns shares of Bellamy's Australia. The Motley Fool Australia owns shares of Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.