Due to the worst downcycle of US pork segment in the past decade, WHG’s 2Q23 recurring net profit dropped 32% YoY to US$209m with the US operations dipping into losses. The weakness of the US pork segment may last till 2024, which could weigh on near term earnings.China operations on the other hand were mostly stable, despite the weak consumption power. While we see China’s operations also facing headwinds, they are relatively mild. Overall, there could be negative news to the hog industry in both China and the US but we expect WHG could still leverage on the volatility of pork prices with its packaged meat products and global trades. With 5x 2024E P/E and an expected dividend yield of >7%, we maintain our BUY rating given the undemanding valuation over its global peers.
　　Key Factors for Rating
　　Weak 2Q23 dragged by the US pork segment. WHG’s 1H23 recurring net profit dropped 45% YoY to US$383m, which suggests that of 2Q23 was down 32% YoY to US$209m. The results were below market expectations, as the US segment recorded a rare US$26m operating losses in 2Q23. This is driven by a sharp deterioration in the upstream hog business, as US pork prices were down 20% YoY in 1H23. In contrast, OP from China has been stable in 2Q23, thanks to improving profitability of packaged meat products from weak pork prices.
　　Weakness in the US could extend till 2024. Mgmt. sees the current down cycle of the US pork segment being the worst in the past decade, and has shut down 100 hog farms in 1H23, accounting for around 7% of its capacity in the US. While WHG expects the hog industry may see some sequential improvement in 2H23 and 2024, there could be costs related to such downsizing (1H23: US$44m). Hence, despite the packaged meat business may benefit from lowering pork prices, we expect the overall operating profit from the US segment may take 2 years to reach pre-pandemic level. That said, we expect the operating profit in 2024 may record a strong YoY rebound of 88% to US$781m thanks to: (i) a low base in 2023, and (ii) recovery of hog cycle in 2024 and hence narrowing losses of WHG’s upstream exposure.
　　We expect China operations could remain stable in 2H23. The performance in China has been largely stable, as revenue and OP were up by 10% and 4% in RMB terms. However, with RMB weakened against USD, operating profit was down 3% to US$520m. We believe this is not bad, considering the weak consumer sentiment in China. We expect WHG would continue to benefit from low hog prices in 2H23, despite the possibility of a rebound. Meanwhile, we expect WHG could also smoothen its earnings in 2H23 by selling frozen pork, which WHG has started to accumulate in 2023.
　　Key Risks for Rating
　　Hog prices in China rising faster than expected; worse-than-expected recovery in the US pork industry; sharp rise in feed cost and lower-than-expected consumer demand in packaged meat products.
　　Valuation
　　We cut our 2023/24E earnings by 15%/4% to reflect: (i) lasting pressure from the US hog cycle and hence weak pork prices in 2023 and 2024; (ii) weak RMB against USD, and (iii) lower meat product sales volume in the US due to strategic downsizing.
Our TP is lowered to HK$4.5, based on 5.5x 2024 P/E (previous: 8x 2023 P/E or 6.5x 2024 P/E). We believe a lower valuation multiple will also be anticipated by the market due to: (i) lower earnings visibility in both China and the US operations, and (ii) unfavourable performance faced by global peers such as Tyson Foods (TSN US, NR) and JBS (JBSS3 BZ, NR).
We maintain BUY as we deem the 2024 valuation attractive as the forward P/E has been in multi-year low, while it could still offer 7% forecasted dividend yield despite the weak earnings. We also see the valuation of WHG, currently trading at less than 5x 2024E P/E, more attractive than its global peers (Tyson Foods at 17.8x and JBS at 6.6x).