1Q20 adj. NP +80% to US$353mn, represents 25% of our adj. NP estimate in FY20E, which we think is in line. China market is improving led by packaged meat segment. In US market, coronavirus epidemic caused near-term uncertainty. The improvement in China market might offset US market in 2Q20E. We expect US market to recover in 2H20 after the epidemic. China’s protein shortage due to ASF and tariff exclusion policy could narrow price gap between China and US pork prices and improve WH’s earnings. Maintain our Buy rating and SOTP-based TP of HK$9.50, representing 13.0x FY20E P/E.
- China market OP +21% to US$277mn. (1) Packaged meat: OP +31% YoY driven by higher OP/tonne (from RMB2,500 to RMB3,700) though sales volume fell 7.5% (POS closure and logistics issue) on virus outbreak. OP/tonne increased because the benefit of price increase and better high-end mix was more than offset cost increase. (2) Fresh pork: OP fell 21% mainly due to 65% hog processing volume drop but partly offset by strong growth of sales of imported pork. OP/head kept at high level (~RMB264 vs RMB246 in 4Q19) driven by sales of low-cost imported pork.
- US market OP +105% to US$226mn. (1) Packaged meat: OP fell 34% mainly due to a US$40mn inventory provision related to closure of foodservices channel under COVID-19. (2) Fresh pork: OP jumped 31% led by 4% growth of hog processed and higher pork price.(3) Hog production: the segment turned around because of hedging gains and higher hog prices.
- FY20E outlook. (1) China market is improving: Management expects hog price to gradually go down in 2H20 but there is no plan to reduce selling price. Packaged meat profitability is expected to be higher in 2H20E on lower hog price and improving product mix. Sales volume is expected to increase in FY20E. For fresh pork, slight recovery of hog processing volume is seen in 2Q20E. Management expects a better recovery in 2H20E. Segment profitability would drop in FY20E on higher unit hog processing cost. (2) Near-term uncertainty in US market: The uncertainty comes from (1) facilities suspension (~25% of annual packaged meat and hog processing capacity) and foodservice channel demand (~32% of packaged meat sales volume) due to epidemic. That said, hog production could remain profitable in 2Q20E because of hedging.
- Valuation. Our SOTP-based TP of HK$9.50 represents 13.0x FY20E P/E. Catalyst: US economy reopening; China reduces tariff rate further or sharply increases import from US. Risks: uncertainties from COVID-19 outbreak, US hog market in severe oversupply.
