20160321-高盛-万洲国际-00288.HK-Strong_US_margins,_US-China_synergy_to_drive_re-rating__CL-Buy_17页_541kb

Summary of WH Group Ltd. Investment Analysis

Core Content

WH Group Ltd. is a leading global pork producer with a strong growth outlook, and the firm reiterates its Conviction Buy rating. The investment thesis is based on the company's strong US business, US-China synergy, and robust free cash flow generation.

Main Points

1. Strong US Business

• Current Valuation: The US business is currently valued at $1.8bn, which is approximately 70% below the Goldman Sachs estimate (GSe).
• Profitability: The US business is primarily driven by the branded packaged meat segment, which accounts for 80% of the profit.
• Growth Prospects: The company expects a 17% OP CAGR for the US business over the next two years due to margin expansion and improved product mix.
• Efficiency Gains: The "One Smithfield" program has improved efficiency, raising the downstream normalized unit profit to $17–22 cents per pound in 2015 from $10–15 cents previously.
• Unit Profit: In 2015, the US packaged meat unit profit increased by about $0.02 per pound, contributing to a 10% increase in OP.

2. US-China Synergy

• Hog Price Premium: China's hog price premium to the US reached 180% in early 2016, the highest level in a decade.
• Import Potential: WH Group expects to import 270K tons of inexpensive US pork in 2016 (up 80% YoY), potentially boosting group OP by 10%.
• Export Benefits: Exports to China can help manage US hog inventory and reduce price volatility.
• Synergy Impact: The synergy is estimated to contribute $147mn–$184mn in 2016–2017, accounting for 10%–11% of group OP.

3. Strong Free Cash Flow

• FCF Yield: The company is expected to generate a strong 10% FCF yield in 2017E, which could lead to lower gearing and a higher dividend payout ratio.
• EPS Growth: The firm forecasts a 13% EPS CAGR from 2015E to 2017E.
• Valuation: The current valuation is at 6.5X 12m forward EVEBITDA, below historical averages and US peers (9X–16X EVEBITDA).

Key Information

Investment Profile

• Target Price: HK$6.0 (17% potential upside from current price of HK$5.12).
• Valuation Metrics:
  • Target EV/EBITDA: 9X for the US business, 8X for China.
  • Target group EVEBITDA: 8.5X for 2016E.
• Coverage: Transferred to Lincoln Kong.

Catalysts

• US Business: Continued margin expansion and product mix improvements.
• Synergy: Monetization of the US-China hog price gap.
• Free Cash Flow: Strong FCF yield and improved returns.

Financial Highlights

• Revenue: Expected to grow from $22,243mn in 2014 to $22,801.6mn in 2017E.
• EBITDA: Projected to increase from $2,128mn in 2014 to $2,162mn in 2017E.
• Net Income: Expected to rise from $971mn in 2014 to $932mn in 2017E.
• EPS Growth: From $0.08 in 2014 to $0.06 in 2017E, with a CAGR of 16.3%.
• Dividend Yield: Expected to increase from 0% in 2014 to 2.9% in 2017E.

Valuation Table

Key Risks

• Slower growth in China's packaged meat sector.
• Unfavorable US/China hog price cycle.

Investment List Membership

• Asia Pacific Buy List
• Asia Pacific Conviction Buy List

Analyst Contributors

• Lincoln Kong: +852-2978-6603, lincoln.kong@gs.com
• Joshua Lu: +852-2978-1024, joshua.lu@gs.com
• Kevin Li: +65-6654-5190, kevinzhenting.li@gs.com

Conclusion

WH Group is positioned to benefit from its US business undervaluation, the US-China hog price differential, and improved operational efficiency. The firm maintains its CL-Buy rating and 12-month target price of HK$6.0, expecting a re-rating driven by strong growth and improved margins.