FY19 adj. NP +32% to US$1,378mn, 4% above our estimates (12% above Bloomberg estimates) due to better-than-expected US hog production profit and lower-than-expected effective tax rate. Dividend payout ratio rebounded from 36% in FY18 to 43% in FY19. Impact from COVID-19 outbreak is insignificant. We expect profit growth in 1Q20E should be good led by US market where hog production segment turns around by hedging (vs US$157mn loss in 1Q19) and YoY better fresh pork margin. We reduced our TP from HK$10.80 to HK$9.50, representing 13.0x FY20E P/E. Maintain Buy, we expect China’s tariff exclusion policy could narrow price gap between China and US pork prices and improve WH’s earnings. Trading at 8.8x FY20E P/E, valuation is attractive as WH trades below historical average P/E of 10.7x but its NP is expected to grow in FY20E.
- FY19 results beat. Revenue rose 7% to US$24,103mn, in line. (1) China: segment profit rose 4% led by 46% profit growth from fresh pork (sale of low-cost inventory) but offset by 5% profit drop in packaged meat profit (high hog price). (2) US: segment profit jumped 52%, driven by turnaround of hog production (hedging gain) and 8% growth of packaged meat profit. (3) Europe: segment profit rose 26% driven by 234% profit growth from hog production on higher hog price.
- COVID-19 impact. (1) China: The virus outbreak caused short-term issues in labor shortage and logistics but were solved by government shortly. The impact on packaged meat retail sales was insignificant. (2) US: Business so far is normal. The Company is running 100% at all production facilities as pork industry is ordered by government to work continuously. Management believes no labor shortage as US unemployment rate could increase amid COVID-19 outbreak.
- FY20E outlook. (1) China: Management expects hog price was peaked in Jan 20. We expect China segment profit to drop by 7% due to decline in fresh pork profit arising from reducing hog processed volume (ASF). We expect packaged meat segment to keep sales volume. OP/tonne is estimated to increase slightly thanks to price hikes in 2019 and launch of mid-to-high end new products. (2) US: Management expects hog production to remain profitable because of successful hedging strategy. Beginning 1 Mar, Chinese government allows its enterprises to apply for 30% tariff exclusion for US pork import for one year. We expect fresh pork margin to improve because of more export sales (usually higher prices than domestic sales). We expect 1Q20E net profit would see strong growth driven by turnaround in hog production and YoY better fresh pork margin (Figure 16).
- Lower TP to HK$9.50. We trimmed FY20E adj. net profit estimates by 1% mainly to reflect lower US hog production profit (lean hog futures prices fell in Mar) but partly offset by higher US fresh pork margin. Our SOTP-based TP is reduced from HK$10.80 to HK$9.50 as we lowered P/E multiples of both China as well as US and Europe businesses after de-rating of peers. Our TP represents 13.0x FY20E P/E (vs 15.3x FY20E P/E previously). Catalyst: China reduces tariff rate further or sharply increases import from US. Risks: uncertainties from COVID-19 outbreak, packaged meat and fresh pork margins below expectation.
