WH Group Earnings: Operating Profit Continues To Be Hampered by Weak U.S. Hog Prices

June-quarter results for narrow-moat WH Group 00288 disappointed, primarily due to an operating loss at its U.S. hog operations. On a positive note, the packaged meat business demonstrated better momentum and moderately exceeded our estimates. But we still cut our 2023 sales and operating profit projections to account for the weaker second-quarter numbers. We concur with management’s view that hog prices in China would start rebounding moderately in the second half. Our fair value estimate is fractionally reduced to HKD 7.4 per share (from HKD 7.5), which represents 11 times 2023 price/earnings and 6 times EV/EBITDA. The weak U.S. upstream outlook is likely to continue to weigh on investor interest in WH Group, although we think many of the current challenges are reflected in the current share price.

Revenue fell 6.9% year on year in the second quarter, due to subdued hog prices across China and the U.S. as well as currency headwinds. Operating profit fell 52% year on year as the U.S. business only broke even during the period. The pork segment in the U.S. posted an operating loss of USD 277 million, completely offsetting the downstream profit, despite the latter reaching a historical high operating margin level of 14.8%. In China, WH Group also faced headwinds from subdued hog prices hurting upstream profits. But the company was able to lift margin moderately in the packaged meat segment by 40 basis points over the same quarter in 2022.

We reduce our full-year revenue and operating profit estimates by 4% and 2%, respectively, primarily due to lower projections for the upstream segment. WH Group aims to reduce its hog production capacity in the U.S. to around 15 million hogs by end-2023 (from 17.5 million). The company expects a lower operating margin for packaged meat in the country for the rest of 2023 due to heightened market competition.