Why China’s new rules are good news for Blackmores Limited and Bellamy’s Australia Ltd

Credit: Bellamy's

The recent furore around the implementation of new food and product laws in China has created a huge amount of uncertainty in the minds of Australian investors, particularly those owning shares in Blackmores Limited (ASX: BKL) and Bellamy’s Australia Ltd (ASX: BAL).

Both Blackmores and Bellamy’s saw their share prices hammered earlier this week, before a subsequent recovery, although Blackmores’ share price is still down 8% over the past week, including a fall of 1.2% to $163.53 in trading today. Bellamy’s share price has fared better, and is down 0.8% for the week, including a gain of more than 6% to $9.97 today.

Bellamy’s has succinctly outlined the new regulations in this ASX announcement, but briefly, it essentially means nothing new for Bellamy’s, and the infant formula producer will continue to sell its products in China both through bricks and mortar shares as well as its online presence.

Bellamy’s will need to get its products registered with the China Food and Drug Administration by 2018, as will all other food producers selling into China. Bellamy’s also already holds registration for its infant formula with the Certification and Accreditation Administration in China (CNCA), and its infant formula already complies with Guobiao product testing standards in China.

As CEO Laura McBain says, “…the guidance provided last night by the Ministry of Finance in China reconfirms that it’s business as usual for Bellamy’s in the ecommerce channel.

Blackmores CEO Christine Holgate also urged Australian businesses to commit themselves even more fully to economic engagement with China. “This truly is the land of opportunity if you have quality products and good people,” she said, but also warned that “we have to be patient.”

The new China rules may make it more difficult and/or expensive for entrepreneurs to bulk buy Blackmores vitamins and supplements and Bellamy’s infant products in Australia and ship to China, which may result in lower sales through that ‘grey market’ channel, but could boost ‘official sales’. It’s important to remember that Bellamy’s makes a bigger margin selling product directly into China than it does to pharmacies and supermarkets in Australia, so growth in official sales is a positive.

Given the tailwinds of a rapidly rising Chinese middle class, demand for high quality Australian products, and the announcement of a two-child policy to replace the one-child policy in China, recent volatility may look like a small speed bump in the long term.

Foolish takeaway

The recent fall in prices may be an opportunity to pick up shares in two high quality businesses, although investors need to be cognisant that the new regulatory framework has yet to be fully drafted.

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Motley Fool contributor Mike King owns shares of Bellamy's Australia. You can follow Mike on Twitter @TMFKinga

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.

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