A better FY22 with margin recovery
- Margins to improve for China pork business amid pork price uptrend while packaged meats to maintain decent profit
- Sound US performance to sustain in later quarters with strong market demand and effective cost control
- Europe operations to see sequential recovery in the near-term
- Maintain BUY with revised TP of HK$6.72
China to see sequential improvement amid pork price recovery. While hog prices lingered at a relatively low level during 1Q22 in China, WH Group’s fresh pork business has improved y-o-y as it benefited from a better meat-hog price spread in hog slaughtering. The favourable pork price has enabled WH Group’s unit profit in packaged meats to reach a record high of RMB4,500/ton. Meanwhile, hog prices in China have bottomed out and started to rebound in April, going back to RMB16+/kg by end of May. As the markets expect hog and pork prices to further recover in 2H22, WH Group could also leverage on the lower pork prices in 1H22 to build up its pork inventory and deliver better margins for its frozen pork segment in later quarters when prices rise. We believe WH Group should be able to sustain a unit profit of RMB50-70/head in its pork segment for FY22/23. The frozen stock inventory could also benefit the company’s packaged meats business with lower raw material costs. As such, WH Group should achieve a unit profit of RMB4,000/ton in FY22 and sustain the margins going forward, along with its continuing product mix upgrade driven by its new products (with 30%+ higher average selling price vs. the others).
Covid-19 disruptions to ease. The COVID resurgence has affected WH Group’s business since late-March, with a different impact on different regions. For example, in Shanghai, Jilin and Beijing, WH Group was able to see strong volume increase in packaged meat sales as WH Group’s products are included in the government’s food supply list, and demand was thus higher during the lockdown. Other cities with less COVID-19 impact saw weaker demand for packaged meats driven by tightening social distancing measures and less travel across provinces and cities. Overall, we believe WH Group’s sales volume of packaged meats could have dropped by a low-single digit during April to May this year in China. However, the recent relaxation of COVID-19 restrictions in certain cities brings good news. Nationwide travel could start to resume gradually in June-July and boost the demand for packaged meats. In addition, WH Group’s ongoing efforts in new products (e.g., ready meals) and channels (e.g., online business) should further support the volume growth in FY22/FY23. We expect WH Group to achieve 4%+ volume CAGR in its packaged meat sales in FY22-23 in China.
US business to sustain decent performance. WH Group continues to see favourable demand in both retail and food service channels, which have provided WH Group with strong pricing power. As a result, WH Group was able to achieve a unit profit of US$800+/ton in packaged meats during 1Q22. While the raw material prices (mainly feeds and pork) have been trending higher, WH Group should face moderate pressure as it should be able to partially mitigate the risks through its successful formula-based pricing and negotiation for packaged meat sales. WH Group should also continue to add value to its fresh pork business with appropriate timing and processing that better fits customers’ needs. While pork sales volume may see a slight decline in FY22, we believe WH Group could continue to outperform the market with higher slaughtering profits. Meanwhile, WH Group is also committed to cost control with its automated processes to reduce labour reliance and hedging strategies to cushion raw material pricing pressure. In general, cost pressure should be well managed in FY22. We also believe WH Group is looking at a 10%+ operating profit margin for its US business in the longer run.
Europe operations to recover better. While pressure on raw material costs and market demand could linger in the near term, WH Group has seen m-o-m margin improvements in Europe. QTD, Europe operations have turned around from loss to profit vs. 1Q22, thanks to its effective price adjustments and ongoing cost management. Although unit profit of packaged meats has reached c.US$300+/ton vs. <US$200/ton in FY19, we still see ample room for improvement compared to China and the US. The newly acquired business in Europe may also continue to support a double-digit volume growth for WH Group’s packaged meat sales in FY22. WH Group should continue to seek appropriate targets to expand its business further in Europe in the medium to long run.