Meeting takeaways: 1Q22 attributable profit up 35%, broadly in line
- 1Q22 Revenue dropped 1% y-o-y to USD6,555m, slightly below expectations, mainly due to lower-than-expected pork prices in China.
- Operating profit/attributable profit rose 28%/35% to US$642m/US$395m, thanks to favourable raw material (pork) prices in China and the enhanced product mix in the US.
- We stay positive on WH Group’s firm sales outlook and margin improvements for FY22. We reiterate a BUY with unchanged TP of HK$6.57.
Key takeaways from 1Q22 results briefing:
Sequential improvement for China
- In China, 1Q22 revenue dropped 23% y-o-y to US$2,200m, mainly attributable to low pork prices that resulted in a 38% revenue contraction in the pork segment. WH Group continued to improve margins of fresh pork sales (up 10x in profits vs. 1Q21), which was offset by losses of frozen pork given the higher costs. Operating profit of China pork segment dropped 58% to US$21m.
- With an expected h-o-h rebound in pork prices by 2H22, WH Group should see margin improvements in frozen pork. Overall, WH Group expects to see sequential improvements in the profit of pork segment from 2Q22 onwards.
- Sales volume of packaged meats in China decreased by 2.5% y-o-y amid fierce competition from other products as raw material (pork) prices remained low. As such, revenue contracted by 3% y-o-y during 1Q22.
- However, operating profit in its China packaged meat segment increased by 26% y-o-y. Unit profit also reached a record high of c.RMB4,500/ton, thanks to the favourable raw material prices as well as the enhanced product-mix that was supported by strong market demand for its high-margin products during the Chinese New Year. Despite cost pressure from potential rebound of fresh pork prices in 2H22, management expects the unit profit to stabilise at c.RMB4,000/ton for FY22, riding on its effective cost control.
Covid-19 impacts in China to be short-lived
- The recent COVID resurgence has affected WH Group’s business to some extent since late-March. So far, disruptions on the market demand for packaged meats may remain in the near term. However, transportation has recovered gradually with the government’s supporting policies and the better control of pandemic in many cities. Staff absence has also been limited to 4% by now. WH Group expects to see gradual recovery of demand for packaged meat products in later quarters of FY22.
Sound US performance to sustain
- In the US, 1Q22 sales volume of packaged meat decreased by 3.5% y-o-y mainly due to the late arrival of Easter holidays this year. Revenue, however, increased by 17% thanks to enhanced ASP that was supported by strong pricing power and a better product structure. Operating profit grew 56% to US$302m. Management expects the unit profit in FY22 to stay above its normal level despite higher inflationary pressure.
- Pork segment revenue in North America expanded by 18% y-o-y to US$1,479m in 1Q22. Operating profit grew 7x y-o-y to US$50m due to rising pork prices in the US, despite the inflation in feed and other costs. WH Group is also committed to maintain a higher price spread in slaughtering business than the market, as it continues to add value to its fresh pork products with appropriate timing and processing.
Multi-measures to support margins
- To further cope with cost pressure in the US, WH Group’s commitment and measures include factory restructuring and optimisation, standardisation of production processes, franchising model, and vertical integration from hog farming to packaged meats.
- In particular, faced with labour shortage, WH Group has enhanced its automated process to reduce labour reliance while at the same time implementing better incentives to retain employees. Hedging strategy also continues to play an important role for WH Group to mitigate volatility. WH Group’s ongoing stringent risk assessment should also help avoiding excess litigation costs in the future.
Europe business
- Packaged meat revenue/volume continued to expand at 24%/21% y-o-y, while revenue/volume of pork segment contracted by 20%/19% due to lower market demand. With inflating raw material costs and energy prices in Europe, operating profit for packaged meat dropped 36% to US$18m, while WH Group also incurred a loss of US$26m in its pork segment during 1Q22.
Overall, WH Group aims to maintain its profitability in packaged meat business in both China and the US despite potential cost pressure this year, while continuing to achieve margin improvements in the pork segments riding on pork price uptrends in China and the US.