EUR 850.00 For Business Accounts Only

Morningstar | WH Group’s Proposed Shuanghui Merger Has Limited Financial Impact; FVE Remains HKD 8.10

WH Group’s planned merger of wholly owned subsidiary Shuanghui Group with its 73.25% owned China-listed subsidiary Shuanghui Development, is meant to simplify the group’s holding structure by removing one layer. Financially, there is limited impact to WH Group and our cash flow projection, and we retain our fair value estimate of HKD 8.10. However, we believe the move could lead to a one-off revaluation gain for WH Group as the merger revalues its underlying holdings of Shuanghui Development. We believe the group has not decided on the specific treatment of this yet, but it would not have any impact to our fair value estimate and should have little impact to our narrow moat rating. WH Group remains attractive at the current level as we see limited long term impact from the risks of higher import tariffs of U.S. pork into China. Its key profit driver remains its ability to sustain its market share and profitability of packaged meat products in its core markets.

Shuanghui Group originally held WH Group’s logistics assets as well but divested this up to its parent prior to this proposed restructure. As a result, what’s left in Shuanghui Group that Shuanghui Development is absorbing is essentially 1.96 billion shares in itself and some sausage casing operations. The latter is issuing new shares worth CNY 40.2 billion, at a 17% discount to its last traded share price, which leads to a slight increase in WH Group’s effective stake in Shuanghui Development to 73.4%.

The proposal is still subject to regulatory approvals and with this uncertainty and the limited impact to our valuation of WH Group, we leave our current views unchanged. We believe WH Group would have the option of writing off the goodwill that may result from this merger to keep from inflating its balance sheet.