We hosted investors’ meeting recently. 4Q19 China and US fresh pork segments profit were strong. We estimate 4Q19E OP could jump 72% (vs +55% in 3Q19). We think FY19E dividend payout could increase from 36% in FY18 on record high NP. Management expects NP to increase YoY in FY20E led by US market. Tariffs exclusion is a potential big catalyst. Maintain BUY and raised TP from HK$9.60 to HK$10.80 on 6-8% earnings upgrade and rolled forward valuation. Our FY19/20E NP is 11%/5% above consensus.
- Expect 117% US OP growth in 4Q19E. (1) Fresh pork: OP/head notably increased YoY driven by widened price spread between pork and hog price. (2) Hog production: though the business was loss-making due to seasonal low hog price, the segment remained profitable due to hedging gains. (3) Packaged meat: segment would see stable growth on better product mix.
- Anticipate 20% China OP growth in 4Q19E. (1) Packaged meat: the Company raised ASP by a total 10% in Oct and Nov to increase OP/tonne YoY (but less than 3Q19) amid surge of hog price. Sales volume was stable YoY. (2) Fresh pork: Average daily processing volume fell from ~30,000 head/day in 3Q19 to >20,000 head/day in 4Q19E due to hog shortage. However, segment OP would grow strongly YoY thanks to more sales of frozen pork and high pork price.
- FY20E outlook. Management expects NP would rise in FY20E led by US market while China market is challenging. Tyson Foods and JBS (top 2 and 3 US pork producers) will increase pork export to China in 2020 after removing ractopamine from their hog farms in 2H19. US hog and pork prices are expected to increase driven by more export. In China, fresh pork profitability would remain good in 1Q20E. FY20 OP would decrease after an exceptional FY19 as a result of falling hog processing volume and rising frozen pork cost. Packaged meat ASP could be increased to keep stable OP of RMB2,800-3,000/tonne. Management believes hog price could reach high level around CNY holiday and soften in 2H on recovering hog supply.
- Tariffs exclusion a potential big catalyst. The Company expects “positive” results from the applications of 25% tariffs exclusion. If approved by government, the pork price spread between China and US could narrow, this would be positive for WH’s China and US business. Also, the tariffs returned could be booked as profit.
- Lifted TP to HK$10.80. We upped our FY19-21E adjusted net profit by 6-8% mainly to factor in better fresh pork margins in US and China. Our SOTP-based TP is lifted from HK$9.60 to HK$10.80 as we rolled forward valuation basis, representing 15.3x FY20E P/E (vs 14.7x FY19E P/E previously). Catalyst: China approves tariff exclusion, reduces tariff or sharply increases import from US. Risk: Packaged meat and fresh pork margins below expectation.
