WH Group published sharp first-quarter performance improvement

Despite posting a revenue decline, China’s leading pork producer said its profit rose sharply in the first quarter and that it expects its performance to improve this year 

Key Takeaways:

  • WH Group reported its first-quarter profit rose 73% year-on-year to $301 million, though its quarterly revenue slumped 8.3%
  • The improving performance follows a major restructuring of the U.S. operations for one of China’s leading pork producers

By Lau Chi Hang

Low pork prices of recent years have taken a bite out of profits for many of the industry’s top producers. But WH Group Ltd.(0288.HK) has found a new recipe for success despite that, surprising the market with impressive financial results that included a sharp rise in its profit during the first quarter. 

WH Group’s two main businesses consist of pork and packaged meats. Pork is its mainstay, covering pig breeding, slaughtering, and wholesale and retail sales. Its packaged meats business is more limited, covering production, wholesale and retail sales of packaged products. The company’s first-quarter revenue was $6.18 billion, down 8.3% year-over-year, with pork and packaged meat sales down 7.8% and 4.1%, respectively. But its profit was much fatter, rising 73% to $301 million, excluding biological fair value adjustments.

Pork prices in the company’s home China market averaged 14.9 yuan ($2.06) per kilogram during the quarter, down 5.1% year-on-year, as the market remained oversupplied. The price was more stable in the U.S., the company’s other major market, where it operates the Smithfield brand, falling only 0.8% to $1.26 per kilogram. Prices in Europe, where WH Group also has a presence, fell 3.2% to €1.60 ($1.71) per kilogram.

U.S. restructuring

One might ask how the company managed to grow its profits so much even as pork prices continued to fall and its sales were weak.

The answer lay in WH Group’s overhaul of its U.S. business, mostly consisting of its Smithfield operation. The company closed and sold processing facilities in California and exited certain pig farming operations in California and Arizona in light of climbing farming costs in those states. It also made major adjustments to its operations in Missouri and Utah by reducing sow numbers, geographically restructuring its operations and closing some farms.

The overhaul helped the company reduce the losses for its U.S. pork business to $27 million in the first quarter, down sharply from a $170 million loss a year earlier.

For its packaged meats business, WH Group’s quarterly operating profit increased by 10.1%, even as its overall sales decreased by 4.2%, as raw material costs in China declined. Its operating profit in Europe doubled thanks to better price management. 

The company’s shares jumped by 5.8% to HK$5.80 the day after the announcement last week, continuing a rebound that has seen them rise nearly 60% from a low of HK$3.65 last October. 

Policy support 

The company was also optimistic on the rest of this year. It stressed that it would continue to strengthen its operations, restructure its product portfolio, expand its sales network and improve its price and cost management. It said it expects resilience for its packaged meats business should help to keep its recovery on track.

The broader environment also bodes well for the company as China rolls out policies to support the industry by reducing the current state of oversupply. The Ministry of Agriculture and Rural Affairs recently issued a “Plan to Promote the Adjustment of Pig Production Capacity 2024” with an aim of cutting the number of breeding sows across China from 41 million to 39 million, which will lead to reduced production and support prices.

Fitch believes the government has sent signals guiding the industry to reduce its capacity to a more reasonable level. CITIC Securities also projects pig productive capacity will continue to decline this year. However, time will be needed to implement those measures, which themselves are only optional for companies, meaning the industry’s current supply glut might not ease until later this year.

At a first-quarter press briefing, Ministry of Agriculture and Rural Affairs official Lei Liugong said the second quarter could see a rebalancing of supply and demand and possible return to profitability for pig breeders.

According to the ministry, the number of newborn piglets across the country has declined year-on-year since last October, and the number of slaughtered pigs will also decline after May with China’s pig farming cycle. So, the ministry expects pig prices to stop falling and rise in the second half of this year. 

Smithfield spinoff

WH Group could also restart its previous plan to spin off and separately list its Smithfield Foods division in the U.S. The company bought Smithfield for more than $4.7 billion in 2013 and delisted it from the U.S. before merging it with its own operations and listing the merged firm in Hong Kong in 2014. It planned to spin off Smithfield last year and relist it in the U.S. But investors weren’t too excited about the IPO, perhaps because of the U.S. business’ poor performance at that time. Now, the process could resume this year as Smithfield improves after the restructuring, which could help WH Group’s valuation.

Investment banks have also cast a vote of confidence in WH Group. Bank of America said the U.S. restructuring is likely to bear fruit and, coupled with the prospect of single-digit growth for its China business, reaffirmed its “buy” rating on the company with a target price of HK$6. UBS also raised its net profit growth forecasts for the company for this year and next to 10% and 5%, respectively, maintaining a “buy” rating and adjusting its target price up by 1.6% to HK$6.50.

WH Group’s current price-to-earnings (P/E) ratio is 15 times, compared with a 19 for Shenzhen-listed Muyuan Foods (002714.SZ) and 24 for Wens Foodstuff (300498.SZ), which seems reasonable considering the company’s recent problems. However, we should also note that its latest stock rally in such a short time has brought the price very close to the investment banks’ targets, implying upside could be limited over the near-term.

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