American Dairy Falls 40% as Growth Wanes

American Dairy (ADY) saw its New York-listed shares crash by more than 40% Monday after it put the brakes on investor expectations for further explosive growth this year.

An oddly named company, American Dairy, based in Beijing, derives nearly all of its revenue from the manufacture and sale of baby formula in China. Publicly traded in the U.S. since 2003, its stock has increased sharply in value since last year, when the company emerged unscathed from the Chinese baby-formula contamination outbreak that killed six infants and bankrupted a rival.

As a result, American Dairy took market share and posted revenue growth on the order of 190% year-over-year. Its stock ballooned from a 52-week low of $6.40 last September to a peak of $44 as recently as last month as retail investors, hoping for continued skyrocketing sales, piled into the stock.

But on Monday, American Dairy issued its reduced guidance, saying second-quarter revenue would increase by just 10% from the year-earlier period.

Slated to release official results later in the month, the company said quarterly revenue would likely come in at $41 million, up from $37 million a year ago, but well below the nearly $80 million it posted in the fourth quarter of 2008.

The reason for that stalled growth? In its press release, the company cited stiffer Chinese regulations in the wake of the contamination scandal, which require new labels with more information disclosed on them.

But some feel that the effects of those tighter regulations remain difficult to quantify in dollar figures. Because of that obscurity, the thinking goes, other problems may be curtailing the company's expansion. Said Hao Hong, an analyst with Brean Murray Carret, a small investment bank that specializes in Chinese small-cap companies, "Without some numbers, it's difficult to say what the main reason is" behind the slowdown. "People are getting a little concerned here," he said. "I don't blame them."

Shares of American Dairy were moving in late afternoon action Monday at $20.42, down $15.43, or 43%, on volume of 2.3 million shares, more than 12 times the daily average.

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