We hosted a NDR yesterday. Key interested areas of investors were profitability of various segments and policy. The improvement of China market performance in 3Q19E, driven by packaged meat segment, is better than our expectation.
- China market is improving in 3Q19E. (1) Packaged meat: It is the second largest segment of WH in terms of profit contribution (38% of segment profit in 1H19). 3Q19E OP/tonne has been improving notably compared to 1H19, led by 4% ASP hike in Jul and consumption of low-cost pork inventory. Cost pressure can be offset. The Shuanghui cooking sausage (双汇筷厨炒菜煎烤肠) launched in late Jun has been well received with average monthly sales volume of 800 tonne. (2) Fresh pork: Due to supply shortage, hog processing volume fell YoY and operating cost/head increased. However, we think OP/head can achieve above normal profitability range (RMB40-60/head) in 2H19E because WH started to sell low-cost pork inventory.
- US market in 2H19 better than 1H19. (1) Hog production: management reiterates the segment can achieve profitable growth in 2H19E and FY19E thanks to hedging done in 1H19. (2) Fresh pork: the business was still loss-making in Jul but turned around in Aug. We expect profitability in 3Q19E to improve from 2Q19. (3) Packaged meat: We expect that OP margin would continue to improve YoY in 2H19E as product mix enhancement carries on.
- All eyes on trade talks in Oct. Regarding the news saying China government would support enterprises to purchase certain volume of US pork without additional tariff, WH has not received any formal notices yet. According to CNBC, US Treasury Secretary Mnuchin said China and US officials would have trade talks in two weeks. Management believes the authorities may have updates on the exclusion of additional tariff after the trade talks.
- China hog price to go up in coming two quarters. Management expects the price hike to be led by YoY sharp decline of hog and sow balance and pork consumption peak season. WH is keeping to source cheap pork overseas as reserves. Given that US hog and pork carcass prices trade at 67% and 69% discount to China’s, respectively, we expect US’ export volume to China to keep going up, which should support US hog and pork prices.
- Maintain Buy. Our SOTP-based TP HK$9.20 represents 14.3x FY19E P/E. Catalyst: China reduces import tariffs or increases pork imports on US pork. Risk: Packaged meat and fresh pork margins below expectation.
