Is Bellamy's Australia Ltd a blockbuster BUY?

After a huge share price fall, Bellamy's Australia Ltd (ASX:BAL) shares are starting to look good.

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Bellamy's Australia Ltd (ASX: BAL) shareholders have been on a rollercoaster ride to say the least.

Source: Google Finance
Source: Google Finance

From $1.30 in late 2014 to $14.50 in 2015 and now $6.74. Bellamy's has kept investors' hearts racing.

What happened?

Since it listed in 2014, the company's strategy has been fixated on China's huge demand for baby formula. It entered normal partnerships with suppliers, but demand came from unconventional channels which sought to get its stock into the hands of Chinese mothers.

Fortunately, the perception of higher quality ingredients lifted its brand power among consumers. Its rapid rise forced supply constraints and a new market emerged for local buyers, which saw tins of formula shipped directly to China — at a healthy premium, of course!

But as with all highly successful markets, new entrants emerged and the space quickly became crowded.

A competitive market is fine so long as your product is perceived to be better than every other and you can charge a premium for it.

But after heavy scrutiny from Chinese regulatory authorities, other baby formula producers became worried that they would no longer be able to sell their product in China once the new regulations took hold. They flooded the market by liquidating their inventory.

Unfortunately, Bellamy's was also discounting products to entice new customers to try its product and broaden its long-term appeal. As it stands however it looks like the price discounting, also discounted its brand appeal.

Now what?

Looking ahead, it is tough to get as excited about Bellamy's infant formula as it is about that of its rival a2 Milk Company Ltd (Australia) (ASX: A2M), which also offers a premium product.

Nonetheless, there will still be a market for Bellamy's infant formula as the Chinese market is able to accommodate multiple players.

However, personally, I believe that once a brand is damaged it is a long, hard road to have it revitalised.

Buy, Hold or Sell?

According to some analysts, fair value for Bellamy's shares lies around $7.50. However, I would be reluctant to rely entirely on such forecasts because inputs for growth expectations make those prices very sensitive to change. Personally, I do not believe there is a reason to rush in and buy. 

I think Bellamy's has a bright future ahead, don't get me wrong (I would not rate it as a 'Sell'). But given the regulatory changes have not yet come into effect I am happy to wait a little while before buying in.

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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