We hosted an investor meeting with management recently. We estimate 1H20E NP to increase by ~45% to US$670mn (47% of our FY20E est.). Looking into 2H20E, while we are positive on softening hog price in China market, we think recent rebound of new cases of COVID-19 in US could delay market recovery. That said, market cap of WH’s Shuanghui equity interests is greater than WH’s market cap, implying Smithfield is free. Maintain Buy on undemanding valuation.
China market OP growth to accelerate in 2Q20E. (1) Packaged meat: Sales volume resumes growth in 2Q20E after a drop in 1Q20 due to temporary shutdown of plants. Raw materials costs declined QoQ as pork price dropped QoQ in 2Q20. We expect OP to grow strongly YoY with a high OP/tonne. (2) Fresh pork: Hog processing volume continues to decline significantly due to ASF but the Company increased import volume of frozen pork to keep fresh pork sales volume stable. OP/head lowered from exceptional high level in 1Q20 to relatively high level in 2Q20E as pork price softened in QoQ in 2Q20.
US market OP growth could be flat YoY. (1) Packaged meat: We expect YoY decline of OP in 2Q20E would be similar to 1Q20 because food service channel was hit by COVID-19 and extra expenses (US$40-50mn) from responsibility bonus payment and epidemic prevention cost. (2) Fresh pork: The price spread between pork and hog prices surged in Apr and May as pork supplies reduced due to temporary factories shutdown in downstream. We expect 2Q20E OP would be higher than 1Q20. (3) Hog production: Hog price slumped because of temporary factories shutdown. Thanks to hedging, we think segment loss would not be significant.
2H20E outlook. (1) China market to benefit from softening hog price: Management forecasts hog price to soften in 2H20E given that sow balance has been improving MoM (Figure 13). Profit margin of packaged meat could further improve in 2H20E. (2) US market depends on COVID-19: The recent rebound of COVID-19 new cases has delayed the recovery by keeping food service demand low. Based on current futures prices and hedging position, management expects hog production segment could be profitable in 3Q20E but loss-making in 4Q20E. Currently US pork price is 77% below Chinese pork price. Smithfield would continue to export a lot of pork to China.
Valuation. Our SOTP-based TP of HK$9.50 represents 13.0x FY20E P/E. Catalyst: US economy reopening. Risks: uncertainties from COVID-19 outbreak, US hog market in severe oversupply.
