Although 3Q22 reported OP (before biological FV adjustments) was up by 10% YoY and meet our expectations, 3Q22 NP missed by dipping 13% YoY to US$213m, due to reasons such as higher finance cost and lower subsidies received. We see the near-term industry outlook faced by WH Group (WHG) could be mixed. Yet, we expect WHG should overcome through its measures implemented to keep group-level recurring NP growth steady. WHG will also record a disposal gain of US$467m in 4Q22. While WHG does not have any plan to distribute special dividends, we believe this could lower its net debt and hence interest rate risk. We reiterate BUY for its undemanding valuation.
Key Factors for Rating
3Q22 operating profit in-line but NPAT missed. WHG reported 9M22 NPAT (before biological FV adjustments) was up by 16% YoY to US$914m. This implies 3Q22 NPAT was down 13% YoY to US$213m, below our expectation. However, if only operating profit is considered, 3Q22 OP was actually up by 10% YoY to US$434m, mostly in-line with our expectation. Mgt. explained the difference between the growth of OP and NPAT was due to: (i) higher finance cost, as USD-denominated debt increased while the interest rate also increased; (ii) lower subsidies received from the Chinese government, and (iii) one-off cost related to the closure of production plants in Western US.
China’s further recovery hinges on COVID-19. WHG’s segment OP in China was US$238m in 3Q22, up 52% YoY. This is mainly due to the turnaround of pork business, as WHG could benefit from selling cheap frozen imported pork.
Yet, due to rising pork prices and also COVID-19, profit from packaged meat was down 15% YoY. Mgt. expects 4Q22 per tonne profit for meat products to further decline, but should be manageable in 2023. However, mgt. also sees that volume should improve in 4Q22, and the full year 2023 should also see a high S.D. volume growth if sales are not hit by COVID-19.
US biz missed on inflation pressure but upbeat on volume outlook.
WHG’s segment 3Q22 OP in the US was US$164m, down 22% YoY despite being a seasonal strong quarter. This is due to the fresh pork segment turned to losses on high inflation. On the bright side, mgt. expects sales volume of meat products should see some uptick in 2023 as shortages of labour ease.
Valuation
We revised up our FY22 EPS forecast by 16% on the disposal gain of US$467m (related to the sales of Saratoga) to be booked in 4Q22, but revised down FY23- 24 earnings by 4-11%, mostly on cost pressure and higher interest costs.
Our TP is revised down to HK$5.9, based on 8x 2023 P/E (unchanged).
Key Risks for Rating
Hog prices in China rising faster than expected; sharp rise in feed cost and lower than-expected consumer demand in packaged meat products.