We lowered FY20-22E adj. NP by 2-11% given that 4Q20E US businesses were weaker than expected. That said, we forecast FY21E adj. NP to rebound 23% driven by US market, mainly on higher hog price and reducing COVID-19 related expenses. We think if FDA authorizes to use Johnson & Johnson vaccine, which would accelerate vaccinations in US, would be a catalyst. Our SOTP-based TP is lifted from HK$8.70 to HK$9.30, equivalent to 13.2x FY21E P/E, as we rolled forward our valuation basis. The stock trades at 9.9x FY21E P/E, lower than historical average of 10.9x. Maintain Buy on undemanding valuation.
- US businesses hit by COVID-19 and one-off items. We forecast US OP to fall by 49% to US$471mn in FY20E. We estimate US$191mn loss in hog production in FY20E (US$11 loss/head). Due to low hog price, less hedging positions and rising feed costs, we estimate loss widened to US$155mn in 4Q20E (vs US$16mn loss in 3Q20). Next, the sales volumes of packaged meat and fresh pork segments in 4Q20E was behind our expectation due to surge of COVID-19 cases. Also, there were one-off provisions regarding settlement of a nuisance lawsuit in North Carolina and termination of a pension account.
- China OP to rise by 19% to US$1,136mn in FY20E. We expect a flat sales volume of packaged meat in 4Q20E due to a later CNY in 2021. 4Q20E OP margin would be stable compared to 3Q20. Packaged meat would see 29% OP growth to US$867mn. For fresh pork, 4Q20E OP would decline QoQ due to less sales of frozen pork. Number of processed hog would resume positive growth in 4Q20E. Fresh pork OP would drop 13% to US$229mn in FY20E.
- Expect recovery in 2021E. In US, we estimate 55% OP growth given that (1) hog price rebound: Current month hog future price +28% YTD and forward futures prices are well above corresponding cash hog prices in 2020 (Figure 2). FDA’s approval of Johnson & Johnson vaccine, which just requires one dose, should accelerate vaccinations. Food service demand should recover when lock-down restrictions ease; (2) less COVID-19 related costs: such amount has been decreasing QoQ since 2Q20 (US$350mn/250mn in 2Q/3Q20); In China, we expect 9% OP growth. Packaged meat margin would improve on declining hog price resulting from recovery of hog/sow inventory in China (+31%/+35% YoY in 4Q20).
- Maintain Buy. We cut FY20/21/22E adj. NP estimates by 11%/8%/2% given that US market recovery was weaker than expected. Catalysts: (1) acceleration of vaccinations in US; (2) hog price drops in China.
