WH Group: 2023 Profit Outlook Suppressed by U.S. Upstream Segment, Downsizing It Would Make Sense

Narrow-moat WH Group posted first-quarter results that missed our estimates on revenue and operating profit, mainly dragged by the hog production business in the United States. Elevated feed costs and lower hog prices have caused a sizable loss in this upstream segment. We reduced our full-year sales and net profit estimates due to weaker first-quarter results. But management hinted that the company would consider significantly downsizing its exposure to the hog production business in the United States. We believe this, if exercised, would be a positive move for WH Group, as the segment has been a key profit drag for years. We lowered our fair value estimate to HKD 7.50 per share (from HKD 7.80 per share), which implies 11 times 2023 P/E and is within its historical range of 7-15 times. But we expect the message delivered on its future U.S. business strategy as a positive catalyst to share price. WH Group’s valuation has been suppressed for a while, likely due to the market’s concern about fluctuation of its profit margin, and the upstream business has been a key source of uncertainty.