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Infant formula companies sink lower on new Chinese e-commerce laws

It certainly has been a disappointing start to the week for infant formula shares.

Although the A2 Milk Company Ltd (ASX: A2M) share price has rebounded from its early decline and is almost 1% higher at $11.60 now, many of its peers are sinking notably lower.

Here is the state of play in the industry right now:

  • The Bellamy’s Australia Ltd (ASX: BAL) share price is down 4.5% to $10.47.
  • The Bubs Australia Ltd (ASX: BUB) share price has fallen 5.5% to 67.5 cents.
  • The Jatenergy Ltd (ASX: JAT) share price is 13.5% lower at 5.8 cents.
  • The Wattle Health Australia Ltd (ASX: WHA) share price is down 4% to $1.22.

Why are these infant formula companies being crushed today?

Today’s declines appear to be in response to a new China e-commerce law that was announced late on Friday.

According to the Global Times, the new law aims to make the fence tighter against unethical sales practices on the internet. It requires that domestic e-commerce websites guarantee that consumers’ rights are protected in online business transactions.

This means that if a consumer suffers from health problems as a result of a product bought online, e-commerce platforms will be held accountable if they didn’t properly audit the business qualifications of the sellers on the platform.

E-commerce website operators will also be obliged to record and store product information as well as transaction information on their platforms.

The new e-commerce law will come into effect from January 1 2019. Further implementation guidance, including implications in respect of the cross border grace period, is expected in the coming months.

What now?

While I’m surprised to see Bellamy’s shares dragged lower on the news, I’m not overly surprised to see the likes of Bubs, Jatenergy, and Wattle Health tumble.

Now that e-commerce platforms can be held accountable for issues, I fear some could be unwilling to stock less established brands that they can’t guarantee the safety of.

Time will tell whether this does impact sales, but for now I would suggest investors wanting exposure to the space stick with Bellamy’s and a2 Milk Company.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. 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 Scott Phillips.

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