October 30, 2019

WH Group sees shares jump as results help lift outlook

Chinese pork producer WH Group has witnessed its shares jumping the most in eight weeks as its third-quarter performance helped boost its outlook, Nikkei Asian Review reported on October 29.

Despite higher import tariffs in China, it is expected that imports of the meat from the US will rise due to the African swine fever outbreak which has tightened the country's meat supply. Furthermore, WH Group owns Smithfield Foods which is based in the United States.

Citigroup analysts this week raised their recommendation on WH Group's shares to "buy" from "sell," noting that the surge in hog prices in China to five to six times the level in the US saw a resumption of pork imports to the mainland in the third quarter.

"Despite no structural change in its long-term fundamentals, we expect its cyclically strong quarterly earnings to last until peak-out" for hog prices in China, which was expected in mid-2020, the analysts led by Xiaopo Wei wrote in a report.

On October 28, WH Group reported an 8.5% increase in net profit before biological fair value adjustment for the January-to-September period to US$820 million, as it earned more from packaged meat sales in the US and Europe, while boosting revenue from the sale of fresh pork in China. Revenue grew 3.7% to US$17.19 billion.

WH Group's shares jumped 5.8% to HK$8.27 (US$2.07) in Hong Kong on October 29 following the results, while the city's benchmark Hang Seng Index dropped 0.4%.

"Big companies can defend their market shares when the supply of raw materials is constrained. From that perspective, WH Group could expand its market share and it won't be surprising if valuations follow," said Frankie Chan, an investment analyst at the family office YTC. He added, however, that the trade war continues to be the biggest concern for the company's prospects.

Wholesale pork prices in China have surpassed the peak reached in May 2016 and surged to ¥56 (US$7.93) per kilograme in the week of October 25, and are now expected to surge further to a range of ¥65 (US$9.20) to ¥75 (US$10.62) per kilogramme in the first half of 2020, Nomura analysts wrote in a report this week.

The analysts said pork output, which slowed a record 42.1% year-on-year in the third quarter, was expected to plunge by an even steeper 60% in the fourth quarter, leaving an imprint on the country's economy.

Analysts at Goldman Sachs said they expect pork exports from the US to China to accelerate over the next year despite import tariffs as high as 72% that are now applied on US pork shipments.

Any relief on import tariffs would be "added positives" for WH Group's shares, they added, referring to expectations that the US and China could reach an initial agreement following months of talks between the two sides.

- Nikkei Asian Review