Bega Cheese shares dive on fears over China demand for infant formula

Its failure to penetrate the infant formula market led to Bega Cheese shares dumped on Tuesday. Photo: Steven Siewert Bega Cheese is trying to move away from commodity products for the bulk of its revenues.
Nanjing Night Net

Bega Cheese bore the brunt of a dairy sector sell-off on Tuesday after revealing its recently launched joint venture with Blackmores is under pressure from weak Chinese demand.

Bega Cheese shares dived after it warned it would write off much of its exposure to a newly formed infant formula venture, which analysts had hoped could help the dairy group transition away from being a bulk commodity processor and boost margins by moving further into the branded-products sector.

Bega shares closed down a heavy 17 per cent at $5.40 Tuesday, near the day’s low of $5.20.

Bega Cheese’s woes spilt over to other makers of infant formula such as Bellamy’s, which shed 2.8 per cent to $12.90 as A2 Milk fell 2.5 per cent to finish at $1.95. A2 Milk generates about a third of its revenue from the infant formula market.

Announced a year ago, the first Blackmores-branded infant formula product was launched in April with initial sales in pharmacies, and more recently in supermarkets.

At its recent analyst briefing, Blackmores said early sales of the venture had topped $9 million as it prepared to enter the China retail market in 2017. Changes under way

“There are significant market changes under way,” Bega Cheese executive chairman Barry Irvin said after Tuesday’s annual general meeting.

“Some of these are short term and we will continue to observe the market as these changes play out.”

The biggest change is the move to close the ‘grey’ market with individuals buying infant formula in chemists and supermarkets and shipping it into China, which prompted the Chinese government to impose regulations to try to shut this market down.

“Chinese demand for infant formula is strong. It is more the change with the market evolving,” Mr Irvin said.

Bega Cheese’s Irwin conceded it will take time for the venture to build a brand presence, which involves taking on global giants of the sector, although Blackmore’s experience in developing product for the China market is seen as an advantage, he said. Contested share

Rivals, however, claim the venture’s share of the infant formula market is less than 1 per cent.

“I was always cautious about that deal,” an analyst said of the Blackmores venture.

“Blackmores doesn’t have a presence [in that market sector] and it meant taking on long-standing players such as Mead Johnson and other groups.

“The heritage value for Blackmores lies with its vitamins business. I always thought China was a reputational issue, with Chinese interested in Blackmores vitamins.”

Bega Cheese has been seeking to move away from relying on commodity products for the bulk of its revenues, and the global surplus of dairy products has squeezed margins across the industry, with the company warning on Tuesday that earnings will be flat this year, before taking into account the write-off from the Blackmores venture.

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