We expect 3Q22 earnings of WH Group （WHG） to be relatively stable.
　　We believe the profitability of US operations should still improve in 3Q, while operations in China could face high base like 2Q22. Nonetheless, we believe the highlight would be on the management’s view on 4Q, given a seemingly challenging landscape: falling pork prices in the US, a new regulation proposed by the USDA, and volatile exchange rates.
　　WHG’s subsequent strategic focus after the exit of Saratoga would also be a key point to watch, in our view. WHG could record a disposal gain of US$467m from this deal, which demonstrates its ability to unlock value. We maintain BUY rating given the valuation.
　　Key Factors for Rating
　　The positives of 3Q22: For China/Shuanghui, the gradual recovery of consumption in China since 2Q22 should be supportive to its sales of meat products, and we expect the logistics to be smoother and less costly. In the US, despite the inflation, we expect that profitability would continue to improve as WHG remained committed to cost optimisation. Specifically, we expect that the shortage of labour would ease when compared to 3Q21. This will be supportive to the cost structure and eventually profit per tonne, in our view.
　　The negatives of 3Q22: In China, Shuanghui would again face a high base for its top-line, and the sales of imported frozen products should see a YoY decline, given the unfavourable price differential. In the US and Europe, inflation is a concern, which could lead to weaker sales and high operating costs （such as utilities）。 We also expect that YoY growth for both top-line and profit should taper, as the contribution from the consolidation of Mexico operations should be less visible （consolidated since July 2021）。
　　4Q22 likely more critical for the delivering of full-year growth. Whether WHG could deliver 3Q22 earnings growth would eventually depend upon its ability of internal cost control. This will be more relevant to 4Q, in our view, given more volatile pork prices. This is more relevant to the US business, as pork price has gone softer YoY since Oct 2022. In addition, the volatile exchange rate in 2H22 may cost WHG some FX losses, given its earnings denominated in USD.
　　Disposal gain of US$467m could boost 4Q22 earnings. On the bright side, on 3 Oct 2022, WHG agreed to dispose of Saratoga Foods Specialty, the spices and seasonings division of Smithfield, for US$588m. WHG would record a disposal gain of US$467m from this transaction, equivalent to 44% of 2021 full year profit. This may boost 4Q22 earnings in a one-off manner, while it may provide some possibility of a higher dividend in 2023.
　　Valuation
　　Our TP of HK$6.60 is based on 8x 2023E P/E （unchanged）。