Better margin recovery
- Easing COVID-19 situation in China to support a mid to high single-digit growth in the sales volume of pork and packaged meats
- Raw material costs to be well managed, while ongoing efficiency improvements support better margin boost
- Europe operations to see better recovery along with potential M&A opportunities
- Maintain BUY with unchanged TP of HK$6.72
Investment Thesis
Fading impacts from COVID-19 disruptions in China. Despite the near-term disruptions from COVID-19 outbreaks in China, we believe WH Group should be able to achieve a mid-single-digit growth in the sales volume of pork and packaged meats in China in FY22, supported by the gradual recovery in the restaurant and catering channels as well as nationwide travel.
Margin improvements ahead. The expected pork price uptrend in 2H22 should translate to better profit margins for WH Group’s frozen pork sales, with the inventory built up at lower costs in 1H22. We believe WH Group should be able to generate a profit of RMB50- 70/head in its China pork segment for FY22/23. Riding on its strong pricing power in both China and the US amid supportive market demand, WH Group should also be able to achieve per tonne profits of packaged meats of RMB4,000+/US$600+ in China/US, respectively, in FY22/23. In addition, WH Group is also committed to efficiency gains in the US with better resource allocation and sow inventory improvement to support higher profit margins.
Better recovery in Europe. With the economic recovery and African Swine Flu (ASF) disease better controlled in Europe, WH Group should see a turnaround from loss to profit in 2Q22, along with pork
price recovery. WH Group should also continue to look at appropriate M&A targets for more growth opportunities in Europe over the longer run.
Valuation:
Our TP remains unchanged at HK$6.72, which is based on SOTP valuation – we value the China operations at 13x rolling PE and US operations at 6x.
Where we differ:
We are slightly more positive than the consensus on FY22/FY23F earnings in view of faster margin recovery ahead.
Key Risks to Our View:
Declining domestic demand, volatility in raw material prices, regulatory changes, food safety issues, and disease outbreaks.
