How is Covid-19 Impacting WH Group’s Business?

Can pork producer WH Group Ltd (SEHK: 288) bounce back from Covid-19 and the US-China trade war? – Pigs WH Group

On 5 August, 2014, WH Group Ltd (SEHK: 288) listed on the Hong Kong Stock Exchange at a price of HK$6.20 per share and raised US$2.28 billion.

Within just a few months of listing, WH Group’s stock price disappointed investors and it now has a market value of HK$101 billion as of August. This is strange given its business has been steady from the time of listing.

The poor performance after the listing is in great contrast to its excellent fundamentals. WH Group as an overseas investment holding company has a reputation for being the world’s largest pork food company.

It controls leading pork company Shuanghui Development (SHZ: 895) and Smithfield, another large pork company in the US.

Covid-19 has hit many international companies since early 2020, with WH Group facing a downward trend this year given the lockdown of factories.

Let’s have a closer look at the other underlying reasons that caused the downward trend in WH Group’s share price.

Economic headwinds and new geographic focus

WH Group’s Chairman and Chief Executive stated in its recent results conference call that floods in China will have limited impact on the group.

However, the African swine fever and economic downturn would affect the entire industry. This means that the second half of 2020 is not optimistic for WH Group.

With downbeat market sentiment, the group has put a hold to its major merger and acquisition (M&A) plans.

The expansion activities will only be reconsidered when the situation improves and the global economy recovers. WH Group will only aim to expand within China through increasing production capacity and product quality.

Businesses in China and the US

With the new business focus in China, it is important to understand WH Group’s business performances.

The company’s net profit (before adjustment of mid-term biological fair value) rose 19% year-on-year but fell 26% year-on-year in the second quarter.

With WH Group’s emphasis of increasing utilisation of its Chinese factories, it has a lower cost of hog production which will improve its profit margin going forward (as shown in the below chart).

Source: WH Group Investor Presentation 2020

Based on the charts, although 49% of revenue by region comes from the US (while China makes up 41.8%), China actually generates 59.5% of operating profit.

As for its US business, the price of live pigs in the US was only 95 US cents, which was maintained at a low level.

At present, the Covid-19 situation has not improved, and no vaccine has been launched yet, so negative impacts to WH Group still exist.

The epidemic has reduced the output of the slaughterhouse industry and US hog prices will be expected to remain low.

Foolish bottom line

Looking at WH Group’s development, investors should be worried about the growth of Shuanghui Development rather than the impact of Covid-19.

Sales revenue has slowed down amid the group’s reorientation to Asia. In addition, the industry-wide downturn in hog prices has a negative impact on WH Group’s global revenue.

In terms of valuation, WH Group’s current share price is around 8.9x price-to-earnings (PE). As the industry leader, the PE ratio is relatively low given its dominant market share.

Even though the current valuation sounds attractive, I would not invest in such a politically-sensitive company with no end in sight to US-China trade tensions.

More reading

The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Hong Kong contributor Edmund R doesn’t own shares in any companies mentioned.

The Motley Fool Hong Kong Limited( 2020

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