1H20 adj. NP rose 18% to US$550mn, 18%/12% below our expectation/consensus, due to epidemic-related costs. 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 +29% to US$550mn in 1H20. (1) Packaged meat: OP +45% as benefited from ASP hikes and product mix improvement more than offset pork costs increase. OP/tonne improved from RMB3,700 in 1Q20 to RMB3,900 in 2Q20. Volume resumed 4.3% growth in 2Q20E (vs 8% drop in 1Q20). (2) Fresh pork: OP fell 18% mainly due to 62% decline of hog processed and increase of hog processing unit cost. This was partly offset by more sales of imported frozen pork.
- US market OP down 6% to US$276mn in 1H20. 2Q20 OP slumped 81% due to COVID-19. WH recorded ~US$350mn costs related to epidemic in 2Q20 incl. pay leave and responsibility bonus for workers (US$195mn), health protection related facilities (US$125mn) and donation (US$30mn). (1) Packaged meat: OP dropped 46% due to 4% volume decline and epidemic related costs. (2) Fresh pork: 2Q20 was profitable as exceptional high price spread due to temporary factories shutdown in downstream more than offset than the negatives of 16% hog processed volume drop and intake of epidemic related costs. (3) Hog production: Hog price decreased 17% YoY due to epidemic. Loss was limited at US$20mn thanks to hedging.
- 2H20E outlook. (1) China market: Management forecasts hog price to soften and packaged meat OP/tonne would not be less than 1H20. For fresh pork, OP would lower HoH in 2H20E due to less frozen pork inventory and rising import pork cost. Import volume of frozen pork is affected by US epidemic. (2) US market: Management sees recovery of packaged meat segment beginning 3Q20E. Utilization rate of fresh pork recovers to around 85% currently. US sector fresh pork price spread normalizes in 3Q20E as sector is recovering. A single-digit dollar loss per head is expected for hog production in FY20E. Epidemic costs would continue in 3Q20E but notably less than 2Q20.
- Valuation. We lower FY20E adj. NP est. by 22% mainly due to US epidemic costs and weak hog price. We assume US market to return to normal in FY21E. We lift FY21/22E adj NP est. by 4%/5% on higher China packaged meat segment margin. Our SOTP-based TP is lowered from HK$9.50 to HK$8.20, representing 11.2x FY20E P/E. Catalyst: US economy fully reopens.
