20160927-农银国际证券-万洲国际-00288.HK-A_leading_integrated_player_in_the_pork_industry_14页_1mb

Summary of WH Group (288 HK) Report (Sep 27, 2016)

Core Content

WH Group is a leading integrated player in the pork industry, operating across China, the U.S., and Europe. It is an industry leader in the U.S. pork production sector through its subsidiary Smithfield, and a major player in China through its subsidiary Shuanghui Development.

Key Financial Highlights

• Share Price and Performance:

  • Share price (RMB): 6.37
  • Estimated share price return: 20.57%
  • Estimated dividend yield: 2.51%
  • Estimated total return: 23.08%
  • Target price (TP): HK$7.68
  • Previous rating and TP: N/A

• Key Shareholders:

  • Heroic Zone Investment Ltd: 23.71%
  • CDH Shine I Ltd: 8.18%
  • CDH Shine II Ltd: 6.53%
  • Chang Yun Hlds Ltd: 4.31%

• Market Cap: HK$93,310.44 million

• Average Daily Turnover: HK$227.42 million

1H16 Financial Review

• Revenue Growth: Increased by 2.43% YoY from 1H15's -3.18% YoY.
• Segment Performance:
  • Packaged meat: +0.66% YoY
  • Fresh pork: +9.93% YoY
  • Hog production: -41.54% YoY
• Profitability Metrics:
  • OPM increased from 6.52% to 9.49%
  • NPM increased from 3.92% to 6.24%
  • CCC decreased from 39.33 days to 36.83 days
• Operating Efficiency:
  • Receivable turnover days: 13.11
  • Inventory turnover days: 37.98
  • CCC: ~36.83 days

Industry Overview

• Cyclical Nature: The pork industry is highly cyclical, driven by supply and demand dynamics.
• Price Trends:
  • Average wholesale pork price in China: ~RMB 16/kg in Apr 2014, ~RMB 27/kg in Jun 2016
  • Retail pork price: ~RMB 21/kg in Apr 2014, ~RMB 32/kg in Jun 2016
• Inventory Trends: Hog inventory has declined steadily since 2013, despite price fluctuations, suggesting farmer exit rather than direct price correlation.

Competitive Advantages

• Global Footprint: Enables operating synergies and cost control.
• Unique Business Model: Skews toward the end of the value chain, providing a competitive edge.
• Slaughterhouse Leadership: The Group is the top operator of licensed slaughterhouses in China, giving it significant influence over the pork market.
• Cross-Regional Synergy: The Group can offset regional price declines by leveraging low-cost pork imports.
• Diversification: Expanding into the poultry business to reduce risk and diversify revenue streams.

Growth Prospects

• Revenue Growth:
  • Expected CAGR: 10.61% from FY15 to FY18
  • FY18E revenue: ~US$28,699 million
• Segment Revenue Contribution:
  • Packaged meat: 53% in FY15, expected to fall to 48.78% in FY18
  • Fresh pork: Expected to rise from 40.51% in FY15 to 43.73% in FY18
• GPM and NPM:
  • GPM: Expected to remain above 19%
  • NPM: Expected to be above 4% in the next three years
• CCC: Expected to decrease to ~32 days in the next few years

Valuation

• Target Price (TP): HK$7.68
• Valuation Metrics:
  • 14.94x / 13.53x FY16E/17E P/E
  • 2.38x / 2.25x FY16E/17E P/B
• Valuation Methods: DCF and market multiple approaches were used to derive the TP.

Risk Factors

• Macroeconomic Risk: Slow economic growth could impact consumer demand.
• Commodity Price Risk: Fluctuations in pork and hog prices affect profitability and biological assets.
• Substitution Effect: Health-conscious consumers may shift to alternative protein sources.
• Biological Asset Risk: Sudden price reversals may lead to impairment of biological assets.
• Regulatory Risk: Tightening food safety regulations increase compliance costs.
• Food Safety Risk: Past scandals may affect public trust.
• Foreign Exchange Risk: Operations in multiple currencies expose the Group to FX fluctuations.
• Interest Rate Risk: Borrowing with both fixed and floating rates is sensitive to interest rate changes.

Shareholding Changes

• Transactions:
  • 880mn shares sold to third parties at HK$5.95
  • 383mn shares transferred to investors by CDH Shine
  • 292mn shares sold to Heroic Zone by CDH Shine II
• Ownership Changes:
  • CDH Shareholders: Reduced from 30.39% to 19.77%
  • Heroic Zone: Increased from 21.72% to 23.71%
  • Public Shareholders: Increased from 35.59% to 44.21%
• Pricing:
  • Shares were priced at a 21.83% premium over the 250-day average closing price
  • FY16E P/E: 11.57x
  • FY16E P/B: 1.84x

Financial Statements

• Consolidated Income Statement (2014A–2018E):
  • Revenue: Increased from 2014A to 2018E
  • Net Profit: Rose from 2014A to 2018E
  • EPS: Improved from 2014A to 2018E
• Consolidated Balance Sheet (2014A–2018E):
  • Total current assets: Increased from 2014A to 2018E
  • ST Biological assets: Increased from 2014A to 2018E

Conclusion

The Group is expected to maintain a strong position in the pork industry due to its integrated operations, unique business model, and leadership in the Chinese slaughterhouse sector. With a BUY rating and a target price of HK$7.68, the Group is projected to deliver consistent revenue and profitability growth in the coming years, supported by its global footprint and diversified business strategy. However, it faces various risks, including macroeconomic conditions, commodity price fluctuations, and regulatory changes.