Wanzhou International rebounded strongly from the 4Q23 trough. Although Wanzhou International's 1Q24 revenue decline narrowed to 8.3% year over year, adjusted net profit increased 140% year over year to US$465 million. The main reason for the decline in revenue is a decline in sales of pork and meat products due to relatively weak consumer demand in China and the US. However, improvements in the pig farming economy (rising pork prices and falling feed prices) led to a year-on-year narrowing of operating losses of US$152 million in the US upstream pork business, and achieved a strong increase in net profit in 1Q24.

Management expects positive growth in operating profit in China throughout 2024. Management pointed out during the performance call that pork prices in China may rise moderately for the rest of 2024, which should drive the operating profit of the company's pork business in China to improve significantly from last year's low base. Although a slight increase in pork prices may have a negative impact on the profitability of the meat products business in China, management believes that sales in the meat products business in China are expected to resume growth in the second half of this year, which should be combined with the company's other measures (such as product portfolio optimization and cost reduction) to offset the negative impact of rising pork costs. As a result, although operating profit in China fell 10% in 1Q24, management aims to achieve positive operating profit growth throughout 2024 (Huaxing forecast: flat).

The normalization of the pork business is expected to drive strong growth in operating profits in the US in 2024. Driven by the positive economic situation in pig farming, Wanzhou International's management seems more confident about the profitability of the US business in 2024. As the US pork supply is still abundant, the average sales price of live pigs fell slightly by 0.8% year on year in 1Q24, but it was significantly better than the 13.5% year-on-year decline in 2023 (USDA data). At the same time, management pointed out that weak feed prices from the beginning of the year to date and business restructuring in 2023 (including shutting down inefficient pig farms or terminating contracts with them) helped the pig farming business to narrow the losses in 1Q24. US inflation also caused the average price of pork to rise 8.7% year on year in 1Q24, increasing the profitability of Wanzhou International's US pig slaughter business, while live pig prices remained stable. Management believes that the US pork business is returning to normal after experiencing the impact of the pandemic and inflation over the past few years, and it is expected that the operating profit of the US pork business will improve in 2Q24 and 3Q24, while 4Q24 may still experience some losses due to seasonal factors.

Reiterating the “Buy” rating, we keep the target price of HK$10.15 unchanged: we still use 15.5 times the 2024 target P/E, which is consistent with Wanzhou International's domestic partner Bloomberg's consistent forecast average transaction ratio, and keep the target price of HK$10.15 unchanged.

Risk warning: Deterioration of Sino-US relations; outbreaks of animal diseases; food safety issues; management succession; and financial hedging risks.