The 2023 results were in line with expectations. Revenue/operating profit decreased by 6.8%/29.7% year-on-year, respectively, mainly due to falling pork prices.
Free cash flow remains strong while capital expenditure falls, and the US business is expected to turn around in 2024.
The “Buy” rating was reaffirmed; the target price was raised to HK$10.15 (corresponding 15.5 times the 2024 price-earnings ratio).
The English version of this Hong Kong Stock Connect report was released by Huaxing Securities (Hong Kong) at 6:30 a.m. on March 27, 2024. The Chinese version was reviewed by Jiang Xuefeng (Securities Analyst Registration Number: S1680519070001) of Huaxing Securities. If you would like to further discuss the views expressed in this report, please contact your sales representative at Huaxing Securities.
The 2023 results are in line with expectations; falling pork prices hurt operating profits: Wanzhou International announced full-year results for 2023. Revenue fell 6.8% year on year to US$26.3 billion, and operating profit fell 29.7% year on year to US$1,471 billion. Both revenue and profit sides were in line with our forecasts. The main reasons for the decline in revenue were: 1) weak consumer sentiment in the Chinese market and a decline in domestic product sales due to the divestment of US assets; 2) weak pork prices in China and North America; and 3) the depreciation of the RMB against the US dollar.
Although the drop in pork prices improved the operating margin of Wanzhou International's domestic products business (from 14.2% in 2022 to 15.2% in 2023), it also seriously damaged the profitability of the company's pork business, particularly in the North American market.
In 2023, pork operating losses in the North American market increased from US$43 million in 2022 to US$624 million, leading to a year-on-year decline in the Group's overall operating profit.
The restructuring continues; cash flow remains healthy; dividend payout ratio increased to ~ 81%. Wanzhou International has been evaluating the North American upstream business (i.e. pig farming and slaughter), which generated losses in both 2022 and 2023. Over the past two years, Wanzhou International has sold or closed several pig farms and production facilities in the US and Mexico. Capital expenditure fell from $975 million in 2022 to $812 million in 2023, and free cash flow in 2023 stabilized at $805 million year over year (compared to $828 million in 2022) despite a sharp drop in profit. As of the end of 2023, Wanzhou International had $1.16 billion in cash on hand. The company raised its dividend for the full year of 2023 to HK$0.30 per share (HK$0.19 in 2022), with a corresponding dividend ratio of approximately 81%.
We anticipate a turnaround in the US business. Prices on the Chicago Mercantile Exchange show that the price of various lean pork futures contracts has increased by an average of about 10% since the beginning of the year. Furthermore, Wanzhou International's management stated during the earnings call that feed prices are expected to weaken in 2024. The above two major trends should help Wanzhou International's US pig breeding business drastically narrow losses. After divesting some of its assets in 2022 and 2023, Wanzhou International also reduced its risk exposure to the highly volatile business of US pig farming. We predict that the operating loss of the North American pig breeding business will narrow to US$246 million in 2024, which in turn will drive the company's overall operating profit to increase by 23.6%.
Reiterating the “Buy” rating; raising the target price to HK$10.15: We are now using 15.5 times the 2024 target P/E (previously 12 times), which is still in line with Bloomberg's current average transaction ratio for Wanzhou International's domestic pork industry (see Chart 3).
Based on our forecast adjustments, we received a new target price of HK$10.15 (previously HK$8.15).
Risk warning: Deterioration of Sino-US relations; outbreak of animal diseases; food safety issues; risk of management succession; risk of financial hedging.