Blackmores fine but share price falls on China worries

There’s nothing wrong with the sector leader, but its dramatic fall from ASX grace reveals wider issues for its peers.

Blackmores CEO Christine Holgate runs a solid company with a tanking share price. Picture: Toby Zerna

It was meant to act as the vanguard of Australia’s great new export boom: consumer goods to China spearheaded by the ASX champion Blackmores, which sold everything from baby formula to vitamins.

But something has gone very wrong with the swag of stocks across the ASX representing the China consumer sector.

In the blink of an eye Blackmores has seen its share price almost cut in half, its peers in the milk exporter sector Bellamys and A2 have also been hit hard.

As for the late-to-the-party new listings of vitamins group Vitaco and China Dairy Corporation … well, Vitaco has disappeared. Shanghai Pharmaceuticals bought the stock, which had hit a high of $3.20, for $2.25 while CDC after an IPO at 20c just months ago is trading below its issue price near 16c. (Tim Boreham’s Criterion column discusses ASX-listed China plays elsewhere in Saturday’s Wealth section).

But it’s the one-time star of the show which has gone through the floor — Blackmores, which opened the year at more than $200 a share, today trades under $120.

The immediate explanations are conventional: Blackmores issued a very subdued outlook to investors at its half-year results a few weeks ago, the group also had specific difficulties in Korea.

Rival milk producers offer similar humdrum explanations for the sector’s sudden difficulties — for example, the opening of new distribution channels between China and Australia is regularly put forward as a recurring problem. Just seven months ago when the Blackmores share price was still hovering at $200, analyst Simon Dumaresq — now with Morgans Stockbroking — told The Weekend Australian the fundamental issue for Blackmores was that though the consumer goods sector in China was growing at 10 per cent a year for Blackmores to justify its lofty share price the company revenues would have to grow at 25 per cent every year for the next decade — with no interruption of any kind.

Six months later that call looks pretty much on the money … and the interruptions have arrived in the form of double trouble … tested stock valuations and new China-based regulations.

Valuations fall to Earth

Blackmores had tripled its stock price in 2015 but some brokers actually called for punters to load up their bets.

Ord Minnett takes the wooden spoon here. On December 18 last year with the stock hitting stratospheric valuations — Blackmores was trading at $205 per share, the broker kicked off coverage with a buy recommendation and a “target” price of $230. That’s what you call missing the boat!

Today Ord Minnett has downgraded its recommendation on the stock from “buy” to that curious status “accumulate” and suggests recent stock guidance created uncertainty over the “true level of underlying sales”.

Ord Minnett now offers a new target price of $150 against a “consensus” target price of $147 … but who’s counting … it’s going to sound pretty unconvincing if you bought anywhere near $200.

China regulations

Perhaps the biggest concerns are China’s food regulators, who have a notorious reputation for

(a) Changing the rules;

(b) Offering no warning or sufficient articulation of rule changes;

(c) Issuing rule changes which coincide with a parallel effort to boost the success of local producers of milk, food or vitamins.

In the case of Blackmores the outstanding issue is that China has clamped down on what they call “the grey market”. You may recall stories of people buying up boatloads of infant formula and taking the goods to China in suitcases to be resold. Inside the business they call these “mules”.

But in recent times China has put a GST-like tax on online sales of consumer goods and coupled that move with a string of new licensing requirements for infant formula and related goods.

What’s more the competition, both local and international, for Australian consumer companies operating in China has picked up. Perhaps the most latent competition may well come from the Pact group, the spin-off from the one-time Pratt empire which just a fortnight ago paid $90 million for Pharmaceutical Manufacturer, a maker of herbal remedies and vitamin supplements.

Separately, there is competition from the likes of an emboldened Wattle Health company now backed by Chinese interests and the Natures Way group.

Blackmores was heading for a fall … it’s arrived. And in a market which marks down companies which fail to deliver very sharply — witness this week’s 30 per cent sell-off of former market darling TPG Telecom — there can’t be negative surprises when you are priced for perfection.

Indeed there is no obvious issue with the management of the company — it appears to be a very well-managed company led by Christine Holgate and chaired by Marcus Blackmore — it has an excellent strategy and first-class execution in most areas.

The problem is not the company it is the stock … and that seems to be the case right across the sector.

Tasmania-based infant formula group Bellamys is the sixth most shorted stock on the ASX

Is it an air pocket? A crisis? Or perhaps most likely of all merely the end of a fabulous phase for Australian consumer goods to China.

A look across the now tainted broker estimates for the sector shows everything from buy to underperform … as more than one analyst suggested this week, “the long-term theme of clean and green Australian consumer products to China is intact”.

That sentiment applies to the companies, not their stock prices, which have clearly fallen to Earth.