20160414-高盛-万洲国际-00288.HK-Nielsen_1Q16_shows_strong_US_up-trend__China_recovery__CL-Buy_15页_510kb

Summary of WH Group's 1Q16 Performance and Investment Outlook

Core Content

This document provides an analysis of WH Group's performance in the first quarter of 2016, highlighting the company's strong up-trend in the US meat market and the recovery in China. The report also outlines the investment case for WH Group, including EPS growth expectations, valuation metrics, and key risks.

Main Points

US Market Performance

• Strong Sales Growth: Smithfield (SFD), a US subsidiary of WH Group, recorded a 2% yoy increase in packaged meat sales, reversing the 4Q15 decline.
• Market Share Gains: SFD gained value market share in key categories like bacon, sausage, and frankfurters.
• ASP Growth: SFD posted better than peers' ASP growth in most categories, narrowing the pricing gap.
• Margin Improvement: US downstream margin is expected to improve by 50bps in 2016E, with a projected 8% CAGR from 2015 to 2017.
• Premium Brands Focus: The shift towards premium brands is expected to drive further margin improvements and sales growth.

China Market Recovery

• Pork Import Surge: China pork imports rose by 80% YTD, driven by high live hog prices.
• US Pork Contribution: US pork is expected to account for 25% of China's total packaged meat usage in 2016, up from 5-8% in 2015.
• Margin Stability: Despite rising live hog prices, the company is expected to maintain stable packaged meat margins at RMB3,000/ton due to the cost advantage of US imports, which are 30% cheaper than China's fresh pork.
• Slaughtering Recovery: Slaughtering volume in China has rebounded to positive growth, reversing the double-digit decline seen in 2H15.

Investment Recommendation

• CL-Buy: The report recommends a Buy rating, citing the strong US and China performance.
• EPS Growth: The company is expected to raise 2-4% in EPS for 2016-18, with a 9% CAGR from 2015 to 2017.
• Valuation: The new 12-month price target is HK$7.0, implying a 17% upside from the current price of HK$5.99.
• Valuation Metrics: The stock trades at 6X 12m forward EV/EBITDA, which is lower than the 10-15X of US peers, suggesting further re-rating potential.

Key Risks

• Margin Pressure: Weaker margins in both China and the US could occur if the cost advantage of US pork is not sustained.
• Hog Price Cycle: Unfavorable hog price movements could negatively impact profitability.

Valuation Metrics

EPS and Financial Growth

Segment Performance

US Operations

• Packaged Meats Profit per Pound: Expected to increase from US$0.16 in 2015 to US$0.22 in 2016E.
• Fresh Pork Profit per Hog: Expected to rise from US$3.23 in 2015 to US$5.30 in 2016E.
• EBIT Margin: Expected to improve from 8.0% to 8.1% in 2016E.

China Operations

• Packaged Meat Profit per Ton: Expected to remain at RMB3,000/ton in 2016.
• Slaughter Volume: Rebounded to positive growth in early 2016.
• Packaged Meats Sales Volume: Expected to increase slightly in 2016E.
• EBIT Growth: Expected to rise by 2% in 2016E.

Investment Profile

• Price Target: HK$7.0 (up from HK$6.5)
• Upside Potential: 17%
• Valuation Approach: SOTP using EV/EBITDA
• Coverage View: Neutral
• Investment Lists: Asia Pacific Buy List, Asia Pacific Conviction Buy List

Key Contributors

• Lincoln Kong, CFA: +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 showing strong performance in both the US and China markets, with improved sales, margin, and market share in the US, and recovery in China driven by increased pork imports and stable margins. The company's valuation is considered attractive relative to US peers, and the investment case is supported by expected EPS growth and margin improvements. Despite the risks, the report maintains a Buy rating for the stock.