3Q19 net profit surged 79% YoY to US$357mn (vs -17% YoY in 1H19), driven by turnaround of US hog production and OP margin improvement of China’s packaged meat and fresh pork segments. We think 3Q19 NP is better than market expectation (our FY19E NP is 8% above consensus). Management expects China market’s high margins of packaged meat and fresh pork in 3Q19 could continue in 4Q19E. US hog production could be profitable in 4Q19E with hedging. Maintain BUY. Our TP is lifted from HK$9.20 to HK$9.60, based on 14.7x P/E.
- US market OP jumped 172% YoY to US$207mn. (1) Hog production: Thanks to hedging, the segment turned around in 3Q19 with US$88mn OP (vs 62mn loss in 1H19). (2) Fresh pork: the segment had slight loss of US$5mn (vs US$17mn OP in 3Q18). (3) Packaged meat: segment OP dropped 4% YoY as OP margin slightly narrowed 0.3ppt to 8.6%.
- China market OP rose 18% YoY to US$284mn. (1) Packaged meat: though hog price surged, the segment saw 6% OP growth due to use of low-cost pork inventory and 4% price hike for >70% products in July. OPM recovered from 16.4% in 2Q19 to 21.6% in 3Q19 (-0.1ppt YoY). (2) Fresh pork: segment OP rocked 123% YoY as OP per head increased from RMB56 to RMB180. Although hog processed volume fell 28% due to slump of hog balance in China, the sales of low-cost inventory significantly improved OP.
- 4Q19E outlook. Management expects the high margins of China’s fresh pork and packaged meat in 3Q19 could maintain in 4Q19E attributable to price increase in Nov/Dec and use of low-cost inventory. Shuanghui’s inventory value further increased 8% QoQ in 3Q19. In US, hog production could be profitable with hedging in 4Q19. Price of US pork carcass trades at 73% discount to China’s. China could import more pork so profitability of fresh pork could improve.
- 2020E outlook. Management anticipates China’s hog price in 1H20 could be higher than 2H20, fresh pork profitability could be lower in FY20E due to higher hog price. In US, hog production’s OP per head could be around US$9-12 based on current futures prices. Management expects improvement in US fresh pork profitability in 2020E driven by China’s pork import demand, investment in factory automation and improvement of factory work flow.
- Maintain Buy. We fine-tuned our FY19-21E adjusted net profit by 1% to factor in better packaged meat and fresh pork margins in China but lower hog production margin in US. Our SOTP-based TP is lifted from HK$9.20 to HK$9.60, represents 14.7x FY19E P/E. Catalyst: China reduces import tariffs or increases pork imports on US pork. Risk: Packaged meat and fresh pork margins below expectation.
