20140912-美银美林-China_growth_with_global_synergies__a_new_Buy_38页_2mb

Summary of WH Group Analysis

Core Content

WH Group (WHG) is the world's largest pork and packaged meat provider, with leadership in China and the US. The company is valued at HK$8 with a 25% upside potential, based on a sum-of-the-parts (SOTP) valuation that implies a 16x 2015E PE. The report highlights the company's potential to benefit from cross-regional synergies and its strong position in leveraging growth opportunities in both markets.

Investment Thesis

WHG is expected to benefit from several synergies post the acquisition of Smithfield, including:

• Launch of Smithfield-branded fresh pork and high-end packaged products in China
• Increased exports of fresh pork and by-products from the US to China
• Lower earnings volatility in the US due to China's demand
• Savings in procurement costs and efficiency improvements

The report also anticipates WHG to act as a consolidator in China, with an improving product mix and increased sales from new products.

Main Viewpoints

China: A Strong Consolidator

• Earnings growth: Expected to grow at a 18% CAGR from 2014E to 2016E.
• Drivers: Strong brand and product innovation, launch of Smithfield products with solid cold-chain support, expansion of channels and capacity, and potential industry consolidation.
• Product mix: Focus on mid- and high-end products with higher ASP and profitability. The percentage of LTMP (long-term meat products) in total packaged meat is expected to increase.

US: Favorable Outlook

• Earnings growth: Smithfield's NPAT is expected to jump to US$0.5bn in 2014E and remain at >US$0.4bn in 2015E/16E.
• Drivers: Favorable grain and hog prices, rising exports to China, lower earnings volatility, and potential lower finance costs.
• Volatility control: Smithfield has used hedging to lock in hog and grain prices, minimizing the impact of price fluctuations.

Key Information

Financial Estimates (Dec)

Valuation (Dec)

• For full definitions of iQmethodSM measures, see page 35.

SOTP Valuation

Key Risks

• Food safety and swine disease: Could negatively affect operations, especially with the history of Shuanghui being impacted by the "clenbuterol hydrochloride" incident.
• Soft commodity prices: Volatility in grain prices, especially corn, affects hog production profitability.
• Earnings volatility: Exposure to soft commodity prices and potential food safety issues could lead to fluctuations in earnings.
• Post-M&A integration delays: WHG lacks experience in integrating international operations, and reliance on Smithfield's management may pose challenges.
• Government policy: Could impact operations and market conditions.
• Currency exposure: Potential impact from fluctuations in foreign exchange rates.
• Key personnel risk: Reliance on Smithfield's management team may lead to risks if key personnel leave.
• Employee share/option schemes: May affect financial performance and stock valuation.
• Placement overhang: Potential dilution from share placements.

Conclusion

WH Group is well-positioned to capitalize on growth opportunities in both China and the US, leveraging its strong vertical integration and market leadership. The report suggests a Buy rating with a price objective of HK$8, indicating potential for re-rating due to cross-regional synergies. However, the company faces several risks, including food safety concerns, earnings volatility, and integration challenges, which must be considered in investment decisions.