China, Korea and Japan banned German’s pork export. We expect certain orders would switch to US and this would benefit WH’s US businesses. Since 1H20 results were announced on 11 Aug, share price has dropped 8% but US market fundamentals have been recovering and US hog price has risen 18%. Furthermore, market cap of WH’s Shuanghui equity interests is greater than WH’s market cap, implying Smithfield is free. Maintain Buy on undemanding valuation.
- What’s new. US lean hog future price +8% in two successive trading days. Germany’s agriculture ministry said pork exports to China and some other non-EU countries have stopped after a case of ASF was confirmed. China, Korea and Japan had banned import of German pork products.
- Germany was the biggest pork producer in EU in 2019. In 2019, Germany exported a total of 977k tonnes of pork meat and offal products to China, Korea and Japan, representing around 10.5% market share of global pork export trade. In 1H20, China, Korea and Japan were top 3 pork meat and offal products exporting countries for Germany, representing 66%, 9% and 3% of its total export volume (571.4k tonnes), respectively. The ban of Germany pork export would benefit other major pork exporting countries like Spain, US and Brazil. If 25% of such volume (244.2k tonnes) is shifted to US, this represents 2%/7% of US pork production/export volume in 2020E.
- US market is recovering. (1) Hog production: US hog price has rebounded 18% since 1H20 results were reported (Figure 3). (2) Fresh pork: Utilization rate of hog processing recovers to around 90% (vs 85% in Aug). 3Q20-to-date gross profit spread has been expanded YoY (Figure 17). (3) Packaged meat: sales volume is expected to recover mildly in 3Q20E. For 3Q20E epidemic-related costs, it would be notably less than 2Q20 because salary payment to staff infected and quarantined, inspection and equipment expenses and donation expenses would be reduced QoQ.
- Maintain Buy. German pork export ban could boost US hog and pork prices. US market contributed 49% and 30% of WH’s total revenue and segment profit, respectively, in 1H20. The increase of hog price is favorable to hog production profitability. Though most of US profit came from packaged meat segment (88% of US profit in 1H20), the increase of hog price would increase hog production profitability, but would not hurt margin of packaged meat segment because there is price adjustment mechanism when hog price fluctuates. Our SOTP-based TP HK$8.20 represents 14.0x FY20E P/E. Catalysts: severe AFS outbreak in Germany and US economy fully reopens.
