WHG had a resilient 1Q24 as NP jumped 140% YoY to US$465m. Although China business suffered from a continuous drag from low pork price, business in the US has shown strong signs of turnaround. This should be supportive to the overall earnings of 2024, and we expect YoY growth to be strong due to a low base in 2023. We expect the improvement of US business would also help the re-rating of WHG, as the spin-off of Smithfield is still on the table. Maintain BUY.
Key Factors for Rating
Strong YoY of 1Q24 NP due to a low base. Although WHG recorded an 8% decline of revenue, NP jumped 140% YoY to US$465m, slightly exceeding market expectations. Key driver for the improvement of profitability is the turnaround of the US operations, as its EBIT jumped 903% YoY to US$622m. Such improvement reflected narrowing losses of US hog farming business and improving slaughtering profits. However, 1Q24 overall NP was still weaker than 1Q21 & 1Q22, reflecting some drags from China business and the US operations not yet fully recovered.
Further improvement in the US operations expected. Mgmt. expected the profitability of US operations should further improve in the following quarters in 2024, as US hog cycle is bottoming while feed cost is favourable. Hence, they are confident to achieve profits for their upstream business in 2Q24 & 3Q24, when this dragged WHG's profits in 2023. Meanwhile, they will remain committed to scaling down their upstream operations. We believe this should be favourable to their long-term stability of profits, and also the valuation of Smithfield if WHG still pushes for a spin-off.
China business still challenging but optimistic on 2H24. The profitability of China operations suffered, as fresh pork segment suffered from unfavourable demand of frozen imported meat. While low pork price also dragged the revenue in 1Q24, mgmt. expected this will continue to support the earnings of packaged meat business, and sales volume should also improve in 2H24 due to a low base and its initiatives to boost sales.
Key Risks for Rating
Hog prices in China rising faster than expected; worse-than-expected recovery in the US pork industry; sharp rise in feed cost and lower-than-expected consumer demand in packaged meat products.
Valuation
We expect the improvement of US business should help re-rating, which has already happened to global peers. We raise our TP to HK$6.5, based on 9x 2024 P/E (previous: 8x).