We expect the company's 2Q24 operating profit to double year-on-year

The 2Q23 profit base is low. We expect the US business profit to improve significantly in 2Q24. We expect 2Q24 operating profit to double year-on-year, in line with market expectations.

Key points of interest

China business: We expect sales of meat products to be under pressure in 2Q24, slaughter business profits will contribute less, and farming business losses will narrow slightly. 1) Meat products: We expect sales to be under pressure in 2Q24 and maintain a high level of profit. We expect the company's meat sales volume to be under year-on-year pressure in 2Q24 due to weak terminal demand and low distributors' willingness to prepare goods. According to national supermarket data, the meat products industry's GMV ratio in April-April 2024 was 13.7%, of which Shuanghui GMV was -12.1%. 2) Slaughter: We expect 2Q24 slaughter business profits to be under year-on-year pressure. We expect slaughter volume to be under year-on-year pressure, mainly due to intense competition, and the expansion of the double exchange system in farmers' market channels. 3) Breeding: We expect fewer 1H24 pigs to be released, and profit side losses will narrow.

US business: We expect the overall pork sector to be profitable in 2Q24, and the meat products business will be stable. 1) Meat products: Due to slight pressure on food and beverage consumption in the US, we expect a certain year-on-year sales gap in 2Q24. In terms of profit, we expect to be stable, and the company is expected to maintain a high level of profit through cost optimization, etc., and it is expected that it will stabilize and return to a higher profit level from month to month. 2) Pork business: According to USDA data, 2Q24 pig prices increased 16% year-on-year (+20% month-on-month). We expect the 2Q24 pork business as a whole (including farming+slaughter) to be slightly profitable. The 2Q23 sector lost nearly 0.28 billion US dollars (operating profit margin) in the same period last year, so there may be a significant improvement in 2Q24 this year. European business: We expect 2Q24 profit to continue the year-over-year growth trend. European pig prices will remain high this year, and we expect the profit of the 2Q24 farming business to increase year-on-year. The company continues to optimize costs in the European region and is committed to increasing the level of tonnage profit. We expect a year-on-year increase in the profit of the meat products business in 2Q24.

The company issued an announcement that it has submitted to the Stock Exchange an application for a business spin-off of Smithfield Foods Co., Ltd. operating in the US and Mexico and an independent listing on the US New York Stock Exchange or NASDAQ stock market. Furthermore, the company's announcement stated that it is expected to remain a subsidiary of the company after the proposed spin-off is completed. We believe that if the subsidiary goes public separately, the subsidiary is expected to increase its dividends to the parent company, and in turn, Wanzhou International's dividends are expected to increase further.

Profit forecasting and valuation

We maintained our core net profit of $1.215/1.358 billion for 24/25. The company traded 7.1/6.4 times the 24/25 P/E; maintained a target price of 6.5 HKD/share, corresponding to 8.9/7.9 times the 24/25 P/E and nearly 24% upward space, maintaining an outperforming industry rating.

risks

US pig prices and breeding costs fluctuate greatly, domestic demand for meat products is relatively weak, and food safety risks.