Company Reports

WH Group operates a vertically integrated value chain in the hog industry across China, the US, and Europe. Through its subsidiaries Shuanghui in China and Smithfield in the US, the company engages in hog production, slaughtering, and packaged meat processing and distribution. Shuanghui is a clear market leader in the packaged-meat industry in China, commanding around one third of value share. WH Group derives close to 90% of its operating profit from packaged meat across China and the US, although Smithfield has a lower market share in processed meat versus Hormel, Tyson, and Pilgrim’s Pride. Profitability of this segment tended to be more stable versus the company’s upstream business.

Narrow-moat WH Group’s first-quarter 2024 results were mixed, with revenue below our estimate but operating profit in China and the US outpacing our expectations. A robust operating margin in the China packaged meat segment drove operating profit growth, as well as a reduced loss in hog production in the US. We lifted our operating margin forecast for 2024 to 7.1% from 6.7% to incorporate the stronger first-quarter numbers, and our 2024 net profit estimate has increased by 4.3%. Nonetheless, our 2025-26 earnings forecasts are essentially unchanged. We retain our fair value estimate at HKD 6.90 per share, which implies 2024 price/earnings of 11 times and enterprise value/EBITDA of 5 times. We think the shares are attractive, with a close to 6% dividend yield for 2024.

Narrow-moat WH Group reported 2023 results that trailed our estimates, due to soft packaged meat sales in China in the fourth quarter and one-off charges from downsizing upstream business in the US. However, packaged meat operating margin in the US beat our expectation. We lift our 2024 forecasts for packaged meat margins across China and the US but leave our long-term earnings forecasts largely unchanged. As a result, we retain our fair value estimate at HKD 6.90 per share, which implies 11 times 2024 P/E, 5 times EV/EBITDA and 4.6% dividend yield. Management intends to prioritize shareholder returns in future, and thus we raised our long-term projected dividend payout ratio to 50%, from 40%. We sees shares as undervalued decent 2024 dividend yield of 5.8% currently.

WH Group operates a vertically integrated value chain in the hog industry across China, the US, and Europe. Through its subsidiaries Shuanghui in China and Smithfield in the US, the company engages in hog production, slaughtering, and packaged meat processing and distribution. Shuanghui is a clear market leader in the packaged-meat industry in China, commanding around one third of value share. WH Group derives close to 90% of its operating profit from packaged meat across China and the US, although Smithfield has a lower market share in processed meat versus Hormel, Tyson, and Pilgrim’s Pride. Profitability of this segment tended to be more stable versus the company’s upstream business.

Narrow-moat WH Group posted another quarter of sluggish results that missed our expectations, due to lackluster performance across the upstream and downstream segments in the U.S. We reduce our fair value estimate to HKD 6.90 per share, from HKD 7.40 per share, with lower profit assumptions. Management reiterated the intent to reduce its low-margin and loss-making hog production exposure in the U.S. But there were no specific updates on the progress or actions to be taken for this business. We think it would take time for the company to spin off its upstream assets given the unfavorable operating environment. Hog prices have been dropping as production bottlenecks normalized in the wake of the pandemic in both the U.S. and China. We think WH Group’s near-term share price is likely to face headwinds as investors focus on the weak earnings outlook.

WH Group operates a vertically integrated value chain in the hog industry across China, the U.S., and Europe. Through its subsidiaries Shuanghui in China and Smithfield in the U.S., the company engages in hog production, slaughtering, and packaged meat processing and distribution. Shuanghui is a clear market leader in the packaged-meat industry in China, commanding around one third of value share. WH Group derives close to 90% of its operating profit from packaged meat across China and the U.S., although Smithfield has a lower market share in processed meat versus Hormel, Tyson, and Pilgrim’s Pride. Profitability of this segment tended to be more stable versus the company’s upstream business.

June-quarter results for narrow-moat WH Group 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.

WH Group operates a vertically integrated value chain in the hog industry across China, the U.S., and Europe. Through its subsidiaries Shuanghui in China and Smithfield in the U.S., the company engages in hog production, slaughtering, and packaged meat processing and distribution. Shuanghui is a clear market leader in the packaged-meat industry in China, commanding around one third of value share. WH Group derives close to 90% of its operating profit from packaged meat across China and the U.S., although Smithfield has a lower market share in processed meat versus Hormel, Tyson, and Pilgrim’s Pride. Profitability of this segment tended to be more stable versus the company’s upstream business.

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.

WH Group operates a vertically integrated value chain in the hog industry across China, the U.S., and Europe. Through its subsidiaries Shuanghui in China and Smithfield in the U.S., the company engages in hog production, slaughtering, and packaged meat processing and distribution. Shuanghui is a clear market leader in the packaged-meat industry in China, commanding around one third of value share. WH Group derives close to 90% of its operating profit from packaged meat across China and the U.S., although Smithfield has a lower market share in processed meat versus Hormel, Tyson, and Pilgrim’s Pride. Profitability of this segment tended to be more stable versus the company’s upstream business.

Narrow-moat WH Group reported 2022 results that broadly met Refinitiv consensus on net profit despite a slight miss on revenue. Operating profit was consistent with expectations. Management noted that inflationary pressure could continue to weigh on margins in 2023. We have lowered our operating margin estimates primarily on the U.S. upstream business and reduced our fair value estimate to HKD 7.80 per share (from HKD 8.10), which implies 11 times 2023 P/E and is within the 10-year historical multiple range of 7 and 15 times. We think shares are undervalued, but the market could be concerned about persistent margin pressure in the near term.

WH Group operates a vertically integrated value chain in the hog industry across China, the U.S., and Europe. Through its subsidiaries Shuanghui in China and Smithfield in the U.S., the company engages in hog production, slaughtering, and packaged meat processing and distribution. Shuanghui is a clear market leader in the packaged meat industry in China, commanding around one third of value share. WH Group derives close to 90% of its operating profit from packaged meat across China and the U.S., although Smithfield has a lower market share in processed meat versus Hormel, Tyson, and Pilgrim’s Pride. Profitability of this segment tended to be more stable versus the company’s upstream business.

Narrow-moat WH Group reported third-quarter results that trailed our estimates of revenue and operating profit, with a wider gap in reported operating profit versus our expectations. The deterioration in the operating margin was primarily caused by the upstream business across China and the U.S., as packaged meat profitability was broadly consistent with our forecasts. We kept our projection for fourth-quarter sales broadly unchanged but lowered operating profit estimates to account for continued pressure in the upstream business in the U.S. We also revised down 2023 pork segment operating profit given expected pressure in feed costs. Our fair value estimate is lowered to HKD 8.1 from HKD 8.4 per share as a result of weaker profit outlook. We believe near-term sentiment for the stock will be suppressed by soft profitability outlook toward the end of 2022 and into 2023.

WH Group operates a vertically integrated value chain in the hog industry across China, the U.S., and Europe. Through its subsidiaries Shuanghui in China and Smithfield in the U.S., the company engages in hog production, slaughtering, and packaged meat processing and distribution. Shuanghui is a clear market leader in the packaged meat industry in China, commanding around one third of value share. WH Group derives close to 90% of its operating profit from packaged meat across China and the U.S., although Smithfield has a lower market share in processed meat versus Hormel, Tyson, and Pilgrim’s Pride. Profitability of this segment tended to be more stable versus the company’s upstream business.

Narrow-moat WH Group reported second-quarter results that were consistent with PitchBook consensus estimates and our expectations. Strength in the packaged-meat business in the United States was the main driver for the over-30% year-on-year growth in operating profit during the period. Rising hog prices in China put pressure on packaged-meat profit during the quarter, but the divisional operating margin stayed at an elevated level. We project modest top-line growth in the second half aided by recovering China hog prices whereas we expect operating profit will continue to be maintained by a favorable packaged-meat outlook across China and the U.S. We retain our fair value estimate of HKD 8.40 per share and continue to view the stock as undervalued with 2022 P/E at 6 times, below historical range of 7-17 times.

WH Group reported resilient first-quarter earnings across China and the U.S. Despite a 1% decline in revenue, the company’s operating profit in the quarter rose 28% year on year whereas net profit increased by 13% year on year. Respectable bottom line growth was consistent with our view that WH Group should see notable rebound of profit this year as hog prices in China stabilize and are no longer a drag to upstream profits. Amidst the immense inflationary pressure faced by consumer staples companies in China, we think WH Group has lower cost pressure due to subdued hog prices in the country. Smithfield’s profitability also outperformed our expectations for the quarter, due to stronger-than-expected demand and operating leverage. As a result, we raised our 2022 net profit estimates to USD 1.50 billion, from USD 1.42 billion.

WH Group operates a vertically integrated value chain in the hog industry across China, the U.S., and Europe. Through its subsidiaries Shuanghui in China and Smithfield in the U.S., the company engages in hog production, slaughtering, and packaged meat processing and distribution. Shuanghui is a clear market leader in the packaged meat industry in China, commanding around one third of value share. WH Group derives close to 90% of its operating profit from packaged meat across China and the U.S., although Smithfield has a lower market share in processed meat versus Hormel, Tyson, and Pilgrim’s Pride. Profitability of this segment tended to be more stable versus the company’s upstream business.

We are transfering coverage of WH Group to a new analyst, and we retain our narrow moat rating but lower our fair value estimate slightly to HKD 8.3 per share from HKD 8.8 per share due to weaker-than-expected 2021 results. Our fair value estimate implies 11 times 2022 P/E, 6 times EV/EBITDA, and a 3% dividend yield. We continue to see the stock as undervalued and believe a turnaround of the hog cycle in China toward the latter half of 2022 would provide a catalyst to the stock price. Hog cycles in China and the U.S. last for 3-4 years, historically. In our view, multiples expansion for WH Group is likely to occur when the hog cycle recovers from its trough. This is driven by reduced profit erosion for its upstream business but a manageable cost level for its downstream packaged meat segment. We think WH Group’s market leadership in China and mature value chain the U.S. put the company at a good position to benefit from rebounding and stabilizing hog prices toward the latter half of this year. We therefore consider the current stock price as attractive.

WH Group operates a vertically integrated value chain in the hog industry across China, the U.S., and Europe. Through its subsidiaries Shuanghui in China and Smithfield in the U.S., the company engages in hog production, slaughtering, and packaged meat processing and distribution. Shuanghui is a clear market leader in the packaged meat industry in China, commanding around one third of value share. WH Group derives close to 90% of its operating profit from packaged meat across China and the U.S., although Smithfield has a lower market share in processed meat versus Hormel, Tyson, and Pilgrim’s Pride. Profitability of this segment tended to be more stable versus the company’s upstream business.

WH Group aims to remain China’s leading packaged meat company through 70%-owned subsidiary Shuanghui and to improve the efficiency of its operations by bringing in new products and practices from wholly owned U.S. subsidiary Smithfield Foods. The access to pork exports from Smithfield provides WH Group's China packaged meat production with raw material security. The group is also investing in vertically integrated activities in Europe. We expect WH Group to focus its activities in China, the United States, and Europe, which are the only regions in the world producing more than 10 million tons of pork annually. For our five-year explicit forecast period, we expect WH Group’s operating profit to be almost equally split between its U.S. and China operations at 47%, with the balance from Europe. Over 80% of profit will come from its packaged meat segment.