Much has been said about the risks facing the infant formula producers recently, but it appears that investors may be forgetting the enormous opportunity that has also been put in front of them.
After they soared to new heights at the end of 2015, shares of companies such as Bellamy’s Australia Ltd (ASX: BAL) and a2 Milk Company Ltd (Australia) (ASX: A2M) have come crashing back down so far this year.
Blackmores Limited (ASX: BKL), a vitamins provider which only recently expanded into producing infant formula as well, has also been hit hard. Its shares are currently fetching around $171, down from almost $221 in December.
The reason behind these falls can largely be attributed to the various regulatory changes made by China in recent months. While these risks are certainly worth considering before buying into the shares the pullback in share prices could also be a great opportunity to reassess the merits of the industry.
All three of the companies mentioned above have enjoyed remarkable growth over the last 12 months or so, spurred by booming demand in China. Australian sales have also skyrocketed, although it is believed that many of these products are also purchased with the intention of selling to China through so-called ‘grey markets’.
By increasing their direct sales to China, these companies can take advantage of superior margins on their products, which should result in even greater profitability down the track.
There is also the baby boom in China to consider. China lifted its highly controversial and decades-long one-child policy last year, which is already showing signs of higher birth rates, according to a report in The Australian Financial Review.
Earlier this year, The Daily Mail UK also noted the cultural appeal of having babies born in the Year of the Monkey (2016), based on the fact that the monkey is deemed to be one of the luckier zodiac animals.
It said: “In some extreme cases, expectant mothers whose due dates fell at the end of the Year of the Sheep have resorted to extreme methods in a bid to delay their child’s birth.”
The Daily Mail UK also noted that doctors in China are advising expectant mothers to book ‘well in advance’ so as to not risk missing out, while three to six-million babies are also expected to be born in the next 12 months.
Understandably, Chinese nationals want their local infant formula producers to benefit from this trend as well. As such, they have made it more difficult for western-based companies to sell their goods in the country.
Assuming that Bellamy’s, Blackmores and a2 Milk can all get the necessary approvals to continue selling their products it would clearly be a good thing for these businesses, particularly at a time where more babies are entering the world and will need baby formula.
Despite their recent falls, shares across the industry are not necessarily ‘cheap’, but they could offer good value for investors with a long-term outlook.