3Q20 NP fell 5% to US$340mn, better than our expectation on stronger-than-expected US and China results. 9M20 NP +9% to US$890mn, accounting for 80% of our FY20E NP (vs 71-72% in FY17 and FY18). Though epidemic continues in US, management believes the worst should be seen in 2Q20. Maintain Buy on undemanding valuation. Smithfield business is free even if we apply 30% holding company discount on WH’s Shuanghui equity interests value (Figure 5).
- China market OP +13% in 3Q20. (1) Packaged meat: OP rose 12%. OP/tonne was ~RMB3,700, less than RMB3,800 in 1H20 because of increased marketing expenses. Sales volume growth improved to 2.3% (vs 1.5% drop in 1H20) led by new products and new channels (EC, food service). (2) Fresh pork: Though number of hogs processed fell 46% to 1.4mn, sales volume only fell 6% as the Company increased sales of frozen pork. OP jumped 33% on ~65% increase of hog price.
- US market OP dropped 2% in 3Q20. 3Q20 OP strongly recovered from 81% drop in 2Q20 as costs related to epidemic narrowed from US$350mn to ~US$250mn. (1) Packaged meat: Sales volume recovered from 12% drop in 2Q20 to 10% drop in 3Q. OP slightly fell 1% as OPM climbed 1.0ppt to 9.8% on lower raw materials costs. (2) Fresh pork: The decline of number of hogs processed rebounded from 16% in 2Q20 to 8% in 3Q20 as the impact of epidemic on utilization rate eased. OP jumped from US$27mn in 2Q20 to US$92mn in 3Q20 due to reduced epidemic costs. (3) Hog production: Hog price decreased 19% YoY. Loss was limited at US$16mn (vs US$37mn loss in 2Q20) thanks to US$200mn hedging gain.
- Outlook. (1) China market: Management targets mid-single-digit volume growth of packaged meat in FY21E. OP/tonne would increase YoY on lower hog price (sow balance +28% YoY as at end of Sep 2020) but partly offset by rising investment in marketing and channels. (2) US market: As number of new cases of COVID-19 reached record high in Oct, management expects further headwinds in coming six months. But the worst should be seen in 2Q20 and demand would recover in FY21E.
- Maintain Buy. We raised FY20E NP by 11% on better US packaged meat and fresh pork and China fresh pork results but lowered FY21/22E NP by 2%/5% on lowered US profit on continuing epidemic. Our SOTP-based TP is changed from HK$8.20 to HK$8.70, representing 13.3x FY20E P/E. Catalysts: severe AFS outbreak in Germany and US economy fully reopens.
