CRASH: Why the Bellamy’s Australia Ltd share price just plunged 43%

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Shares of Bellamy’s Australia Ltd (ASX: BAL) have been crunched, down 43% at the time of writing, within minutes of the ASX’s open this morning.

As one of Australia’s premier producers of infant formula to the large markets of Asia, Bellamy’s today announced a downgrade to its Chinese ambitions as a result of a “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 Ltd (Australia) (ASX: A2M), 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” given the company’s formula is “stocked in less than 5% of the potential distribution points”, 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,” Bellamy’s statement to the ASX read.

Ultimately, Bellamy’s said it is well placed to meet the tougher scrutiny of regulators, but its growth ambitions will be cut short. While company-wide revenue rose 24% in the year to 20 November, the company expects its operating profit margin to drop below 20% in the first half of its 2017 financial year, down from 22% last financial year.

Additionally, the company expects revenue for each of the first and second halves of its 2017 financial year to stagnate at $120 million if current trends persist . Forecast revenue of $240 million compares to the $244 million the company reported last financial year.

Foolish takeaway

Investors holding Bellamy’s shares would be bitterly disappointed by today’s news — and the subsequent share price fall. However, selling now will not take back the losses that have already been incurred.

Do not let the market be your master.

Now, more than normal, it is important to consider how the forecasts change your original thesis. If I personally held shares of Bellamy’s today — which I do not — I would NOT sell out. But that is easy for me to say.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

The Motley Fool Australia owns shares of A2 Milk and 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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