20210226-招银国际-万洲国际-00288.HK-Recovery_led_by_US_market_in_2021E_11页_1mb

WH Group (288 HK) Equity Research Summary

Core Content

This report provides an analysis of WH Group's financial performance and outlook for FY20E to FY22E, with a focus on the US and China markets. It highlights the company's recovery in the US market in 2021E and the continued growth in the China market. The analyst maintains a Buy rating due to the company's undemanding valuation and the potential for recovery.

Key Financial Highlights

Metric	FY18A	FY19A	FY20E	FY21E	FY22E
Revenue (US$ mn)	22,605	24,103	25,545	25,969	27,550
Net profit (US$ mn)	1,047	1,380	1,035	1,331	1,514
Adj. net profit (US$ mn)	1,046	1,378	1,085	1,331	1,514
Adj. EPS (US$)	0.071	0.094	0.074	0.090	0.103
Adj. P/E (x)	12.5	9.5	12.2	9.9	8.7
P/B (x)	1.7	1.5	1.3	1.2	1.1
Yield (%)	2.9	4.5	3.4	4.3	4.9
Adj. ROAE (%)	13.8	16.8	11.5	12.5	13.1

Main Points and Key Information

US Market Performance (FY20E)

• US OP fell by 49% to US$471mn in FY20E, mainly due to lower hog prices, less hedging, and higher feed costs.
• In 4Q20E, the loss widened to US$155mn, compared to US$16mn in 3Q20E.
• Sales volumes for packaged meat and fresh pork segments were below expectations due to the surge in COVID-19 cases.
• One-off provisions, including a nuisance lawsuit and pension account termination, impacted results.

China Market Performance (FY20E)

• China OP rose by 19% to US$1,136mn in FY20E.
• Packaged meat OP is expected to grow by 29% to US$867mn.
• Fresh pork OP declined by 13% to US$229mn due to reduced frozen pork sales.
• The packaged meat segment saw a flat sales volume in 4Q20E due to a later CNY in 2021.
• OP margin remained stable compared to 3Q20E.

Recovery Outlook for 2021E

• US market is expected to recover significantly, with 55% OP growth forecasted for FY21E.
  • Hog prices rebounded by 28% YTD, and forward futures prices are above 2018-2020 cash prices.
  • FDA's approval of the Johnson & Johnson vaccine is seen as a catalyst for faster vaccination and recovery in the US.
• China market is expected to grow by 9% in OP for FY21E.
  • Packaged meat margin is expected to improve due to declining hog prices from the recovery of hog/sow inventory.
  • Hog inventory in China increased by 31% YoY in 4Q20 and sow balance growth accelerated to 35.1% in Dec 2020.

Valuation and Target Price

• The target price was raised from HK$8.70 to HK$9.30, equivalent to 13.2x FY21E P/E.
• The stock currently trades at 9.9x FY21E P/E, slightly below the historical average of 10.9x.
• Maintain Buy due to the undemanding valuation and recovery potential.

Earnings Revisions

• Earnings were revised downwards for FY20E, FY21E, and FY22E, with the largest adjustments in Operating Profit and Adj. net profit.
• The Operating Margin is expected to improve from 7.2% to 8.9% in FY21E, while Net Margin is expected to increase from 4.2% to 5.5%.

Segment Performance (FY20E)

• Packaged meat had the highest growth in OP margin (from 7.1% to 8.5%).
• Fresh pork segment saw a 14.4% growth in revenue for FY21E.
• Hog production segment was the most volatile, with a -49.4% OP in FY20E and a 19.0% growth in FY22E.

Share Performance

• Market Cap: HK$102,629 million.
• Avg 3 mths t/o: HK$249.22 million.
• 1-mth return: 3.1% (Absolute), 2.1% (Relative).
• 3-mth return: 1.2% (Absolute), -9.5% (Relative).
• 6-mth return: -1.8% (Absolute), -15.5% (Relative).

Major Assumptions

• US market: Expected to benefit from vaccine approval, recovery in food service demand, and higher hog prices.
• China market: Expected to benefit from inventory recovery, lower hog prices, and improved margins.
• Europe market: Revenue is expected to grow, with packaged meat being the main driver.

Key Catalysts

• FDA approval of Johnson & Johnson vaccine to accelerate US vaccinations.
• Hog price drops in China, which should improve margins.
• Recovery in food service demand in the US as lockdowns ease.

Conclusion

The report highlights that WH Group is expected to see a strong recovery in the US market in 2021E, driven by improved hog prices and reduced pandemic-related costs. The China market is also anticipated to grow, supported by inventory recovery and margin improvements. The analyst maintains a Buy rating due to the undemanding valuation and the potential for recovery, with the target price at HK$9.30. The company's financial performance and segment growth are under close scrutiny, with a focus on the impact of the pandemic and the recovery in hog prices.