Although it has rebounded higher in afternoon trade, the Bellamy's Australia Ltd (ASX: BAL) share price was 2.5% lower at $7.07 this morning.
This meant the infant formula and baby food company's shares were trading within sight of their 52-week low of $6.71.
Why did Bellamy's shares drop lower?
The catalyst for this decline appears to have been a broker note out of Goldman Sachs this morning.
According to the note, the leading broker has downgraded the company's shares from a buy rating to a neutral rating. It has also slashed the price target on its shares by a massive 36% to $8.50.
Goldman made the move due to concerns that near to medium term headwinds are likely to persist and because of the lack of a catalyst to take its shares meaningfully higher.
The trigger for this was the latest data from its Tmall/Taobao tracker. This data continues to point to negative trends, with Bellamy's total sales on these platforms for the three months and six months to December 31 down 28% and 42%, respectively, on the prior corresponding period.
In addition to this, the broker's channel checks "suggest an abundance of product across Australian retailers and Daigou stores, particularly stages 1 and 2 product."
Because of this Goldman has slashed its forecasts significantly and now expects its first half Australian label sales to be down 20% on the prior corresponding period. This is below Bellamy's own forecast for a decline of 10% to 15%.
And for the full year the broker has predicted a 5% decline in Australian label sales, compared to company guidance for flat sales.
What else?
But this isn't the only bombshell the broker dropped today. Due to organisational and management changes at China's State Administration for Market Regulation (SAMR) and potential additional site inspection requirements, Goldman Sachs doesn't expect Bellamy's to be granted SAMR approval for some time to come.
As a result, it doesn't expect Bellamy's to be able to sell its products on the China mainland until FY 2021. If this estimate proves accurate then the company's target of hitting $500 million in sales by the end of that financial year seems unlikely to be achieved in my opinion.
What now?
Bellamy's applied for its SAMR accreditation all the way back in December 2017, so the prospect of it not receiving it until FY 2021 would be bitterly disappointing and limits it growth potential over the near term.
While I still feel it would be a good buy and hold investment, investors might want to stick with A2 Milk Company Ltd (ASX: A2M) until management adds more colour with the release of its half year results next month.
