WH Group - 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
- Europe operations to see better recovery along with potential M&A opportunities
- Maintain BUY with unchanged TP of HK$6.72
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Raw material costs to be well managed. Hog and pork prices rebounded and have been trending higher in China since April. While the price uptrends of hog and pork could continue in 2H22 with potentially tighter supplies, WH Group could also leverage on the price momentum, as it has built up its frozen pork inventory at lower prices during 1H22, and should achieve better profitability in 2H22 as pork prices recover further. We believe WH Group should be able to generate a profit of RMB50-70/head in its China pork segment for FY22/23. Packaged meat sales could also benefit from the lower raw material costs. In the meantime, WH Group could also take advantage of its strong pricing power in both China and the US, and safeguard its profit margins for packaged meats with appropriate price adjustments, given the supportive market demand in both countries. Along with the ongoing product-mix upgrade, we believe WH Group should be able to achieve unit profit of RMB4,000+/tonne and US$600+/tonne in China and the US, respectively, in FY22/FY23, which may also be maintained over the medium term.
Ongoing efficiency improvement. WH Group also continues to focus on efficiency improvements in the US in order to achieve a better operating profit margin. For example, faced with strong domestic demand in the US, WH Group has improved its resource allocation via the relocation of facilities and the integration of production capacity. We believe WH Group should continue to achieve the utilisation rates of 80%+/90%+ in packaged meats and hog slaughtering there in FY22, along with the easing of pressure from the labour shortage in the US. While WH Group has benefited from the vertical integration of its upstream operations, we believe it should also continue to improve its sow quality and achieve a PSY (pigs per sow per year) above the industry level of 24+. As such, we also expect WH Group to achieve an operating profit margin of 7%+ in FY22/FY23 (FY21: 6.5%) in the US.
Europe business to stage better. With the continuing economic recovery in Europe that has been driven by the improved COVID-19 situation, market demand for pork and packaged meats could be stronger since 2Q22. African Swine Flu (ASF) outbreaks are also better controlled in Europe, leading to a potential recovery of frozen pork exports in 2H22. With the contribution from the acquired business in 2021, sales volume of packaged meats should grow by double digits for FY22. Despite the currency depreciation in Europe, WH Group may still score a mid to high-single digit revenue growth from Europe operations in FY22. We believe WH Group’s Europe business should also see a turnaround from the loss in 1Q22 to profit in 2Q22, as the local pork price recovery could also support better profit margins. Given the growth opportunities in Europe, we believe WH Group should also continue to look at appropriate M&A targets to expand its business there.
1H22 results preview. We expect to see an overall flattish volume of packaged meat sales in 1H22 vs. 1H21, while revenue from this segment may see mid to high single-digit growth y-o-y, thanks to the decent ASP increase. Despite the expected decline in pork segment revenue, we believe WH Group should be able to score low to mid-single-digit growth in group revenue during 1H22. Supported by decent unit profit in packaged meats, operating/attributable profit should also stage 20%+ y-o-y growth vs. 1H21, on a low base.
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