Proposed spin-off of part of business of Smithfield Foods. WH Group announced a proposed spin-off of business of Smithfield Foods, Inc. operated in the U.S. and Mexico (Smithfield for short) for a separate listing on either the NYSE or the Nasdaq. WH Group has not specified the timeline or listing valuation. Some of the consumer goods companies have listed their subsidiaries in the US - a notable case would be Amer Sports (AS US) by Anta (2020 HK) in early 2024. We believe that successful listing of subsidiaries would encourage China's consumer goods companies to follow suit, strengthening their foreign presence and laying the groundwork for future global expansion.
Pork segment weighed on recent performance. According to WH Group, Smithfield's revenue declined by 10.1% YoY and 8.1% YoY in 2023 and 1Q24. 1Q24 revenue decline of packaged meat segment lessened, but that of pork segment accelerated. Product segment OPM of Smithfield varied, with packaged meat segment OPM outperforming that of pork segment. In recent quarters, Smithfield's pork segment revenue was lower than that of Tyson Foods (TSN US), which is one of its major US peers, and operating profit of its pork segment was less than that of Tyson, which is also reflected in the OPM performance. We believe Smithfield needs to engineer a turnaround to boost listing valuation. WH Group mentioned efforts are underway to improve its North American farm portfolio recently. The targeted restructuring efforts would help streamline the pork segment operations and potentially act as a catalyst to increase listing valuation.
Maintain BUY; TP at HK$ 6.6. Reiterate BUY on WH Group's improved profitability in 1Q24, projected recovery in growth momentum, and potential enhancement of financial position resulted from the Smithfield listing. Yet, the listing still faces uncertainties. As such, our DCF-derived TP remains unchanged for now. Current TP represents 8.9x/7.8x 24E/25E P/E, or 1.0x/0.9x 24E/25E P/B.
Risk factors: 1) Macroeconomic risk; 2)) Regulatory/policy risk; 3) Product quality/safety risk; 4) Risk of changing consumer taste; 5) Pork price remains low for an extended period; 6) Foreign exchange risk; 7) Interest rate risk; 8) Fluctuations in EPS and DPS growth; 9) Potential failure of Smithfield listing.