Blog: Dean BestInflated expectations hit American Dairy shares

Dean Best | 14 July 2009

Shares in American Dairy plummeted on the NYSE yesterday (13 July), dropping by about 40% after the Chinese dairy and infant formula group said it expects second-quarter sales growth of 10%.

Under different circumstances – if another company, in another sector, in a different market, issued such an outlook – there could well have been a jump in its share price.

However, when American Dairy emerged from last year’s melamine scandal unscathed, posting revenue gains of 190%, investor expectations were raised.

These expectations inflated the company’s share value, which swelled from a low of US$6.40 last September to a high of $44 last month. 

In yesterday’s guidance update, American Dairy said it expects revenue to increase to around US$41m from $37.3m reported in the corresponding period of 2008. However, this is considerably lower than the group’s first-quarter revenue gains, which increased 191.1% to reach $113.8m.

Growth was hampered by tightened Chinese regulations in the wake of the melamine scare, including new labelling and safety requirements, the company said.

The company’s failure to live up to overblown expectations sparked American Dairy’s shares to drop from an open of $35.85 to close at $20.08.

This valuation probably reflects a more realistic estimation of the company’s performance and growth potential.

Nevertheless, American Dairy does remain well-positioned to capitalise on the opportunities in the high-growth Chinese infant formula market. Indeed, the company said that it anticipates second-quarter sales of its core infant formula business to grow by more than 100% year-on-year.

"I believe we have only just begun to recognise growth in the infant milk formula market, and we recently made investments to help us achieve these market share goals," CEO Leng You-Bin said.

So, while investors might be disappointed at the company’s failure to deliver sustained explosive sales growth in the short-term, in the longer term it seems American Dairy intends to focus more shapely on its value added infant formula business, where it has invested in growing production and building its Feihe brand.

Katy Humphries, deputy editor


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