1Q22 results in line with our expectation
WH Group announced 1Q22 results: Revenue fell 0.83% YoY to US$6.56bn, and core attributable net profit (excluding fair value change of biological assets) rose 34.8% YoY to US$395mn. The profit was in line with expectation.
　　Trends to watch
　　US meat product segment: Sales volume fell 3.4% YoY in 1Q22, as COVID-19 conditions affected restaurant demand and labor shortages weighed on supply. The per-tonne profit of US meat products reached a record of US$848 in 1Q22 although it was slow season for US hog prices, i.e., prices were low. We see three likely reasons for the per-tonne result. First, a portion of the firm’s products are priced on a cost markup model, which allowed the firm to raise prices of its products. Second, a severe labor shortage in the US led to pork being in short supply, and the firm upgraded its product structure. Third, since 2H21, prices have increased notably in the US for various proteins such as beef, chicken and turkey, and demand was strong for pork and deep-processed pork products. We expect sales volume of US meat products to increase in 2022, if COVID-19 conditions ease and restaurant demand recovers. We also expect per-tonne profit of US meat products to rise in 2022 on the back of upgraded product structure.
　　US pork segment: The hog production business reported a loss in 1Q22 due to low hog prices in the US. Earnings of the slaughtering business were strong, with unit profit high at US$22. We believe this was due to high prices for proteins in the US, and pork began to replace other proteins, expanding the price spread between hog and pork; and the firm optimized distribution channels for fresh pork and upgraded its product structure. The operating profit of the US pork segment reached US$50mn.
　　European business: Operating profit was -US$2mn in 1Q22 as the outbreak of African swine fever impeded pork exports and weighed on hog prices in Europe, sending the hog production business into a loss. Operating profit of European meat product business fell YoY and QoQ to US$18mn in 1Q22, as the Russia-Ukraine conflict pushed up energy prices, raising costs. However, hog prices began to rise in March, and the competitive landscape is improving as some farmers have exited the market due to falling prices. Also, the firm has recently started raising prices of meat products in Europe, and we think the boost will be reflected in 2Q22. Therefore, we expect the operating profit margin of European business in 2022 will improve compared with 1Q22.
　　Financials and valuation
　　We maintain our core net profit forecast for 2022 of US$1.43bn and for 2023 of US$1.45bn. WH Group is trading at 6.2x 2022e and 6.1x 2023e P/E. We maintain OUTPERFORM and our TP of HK$6.40 (7.4x 2022e and 7.3x 2023e P/E with 19.0% upside).
　　Risks
　　Fluctuations of pork and hog prices in China, Europe and the US.