EUR 850.00 For Business Accounts Only

Morningstar | Minor change to Stewardship section; FVE and Cashflow Forecasts Unchanged

WH Group aims to remain China’s leading packaged meats company through 73% owned subsidiary Shuanghui and to improve the efficiency of its operations by bringing in new products and practices from its wholly owned U.S. subsidiary Smithfield Food. The access to pork exports from Smithfield provides its China packaged meat production with raw material security. At the same time, the group is also investing into vertically integrated activities in Europe. We expect WH Group to focus its activities in China, the U.S., and Europe, which are the only regions in the world producing more than 10 million tons of pork annually. For our five-year explicit forecast period, we expect WH Group’s operating profit to be almost equally split between its U.S. and China operations at 47% with the balance from Europe. In terms of products, over 80% of profit will come from its packaged meats segment.The retaliatory import tariffs on U.S. meat imports by China will hurt WH Group’s near-term earnings following a sharp drop in U.S. hog futures prices in mid-2018, but this is already rebounding and we anticipate 2018 to be the low point. Both Smithfield’s and Shuanghui’s packaged meats operating margins are expected to remain stable since input price swings are largely passed through to consumers. So, despite the U.S.-China trade war adding volatility, WH Group’s core packaged meats profitability remains intact. This will help mitigate fresh pork segment profit volatility. Waning popularity in the U.S. and Europe means pork consumption growth is sluggish, but this is offset by growth in China as rising affluence is raising the overall consumption of meat in China. Western-style chilled raw packaged meats consisting of items such as bacon and sausages, are expected to see stronger growth as they gain in popularity in China’s wealthier Tier 1 and Tier 2 cities. In 2016, the group set up eight regional product development centers to create new products that will better meet the tastes of local customers. We think this will enable WH Group to be nimble in its product placement. Growing packaged meat sales underpins the drive to boost its processing plant operating leverage.