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Buy WH Group Deutsche Bank Markets Research Rating Company Date 27 February 2018 Buy WH Group Coverage Change Asia Hong Kong Reuters Bloomberg Exchange Ticker Price at 26 Feb 2018 (HKD) 9.65 Consumer 0288.HK 288 HK HSI 0288 Price target - 12mth (HKD) 11.50 Food & Beverage ADR Ticker ISIN 52-week range (HKD) 9.74 - 5.94 WHGLY US92890T2050 HANG SENG INDEX 31,499 Time to add more protein; resuming Mark Yuan Anne Ling coverage with Buy Research Analyst Research Analyst (+852 ) 2203 6181 (+852 ) 2203 6177 Well-positioned in pork price cycle; global trade profit to expand; Buy [email protected] [email protected] We like WH Group for three reasons. First, we expect both US and China’s segment margin to expand, backed by a lower hog price in 2018; second, we expect the global trading profit to improve in the long term, helped by Price/price relative increasing synergies within different subsidiaries; and third, product mix upgrade in China should drive sustainable sales growth. We believe the risk- Performance (%) 1m 3m 12m reward for the stock is attractive at 13.9x 2018E P/E vs. 11.4% earnings CAGR Absolute 4.0 19.1 59.2 in 2018-20. We resume coverage on the stock with a Buy. HANG SENG INDEX -5.0 5.5 31.4 Declining hog price to drive margin expansion in near-term Source: Deutsche Bank In 2018, we expect the pork price to continue to decline, by 10% in China, as the current hog-raising profit is still much higher than the historical average and should lead to increasing supply. In the US, USDA expects the pork price to fall 6% yoy in 2018, helped by a 5% yoy volume rise in 2018. We forecast WHG’s gross margin to improve 50bps in 2018, helped by a lower pork price. Global trading profit on an expanding trend We forecast US-China trading profit contribution to increase from US$297m in 2017 to US$453m in 2020, helped by a structurally lower hog-raising cost in the US and increasing import volume of by-products. The hog price has been 50% lower in the US than China in the past 6 years due to a lower feeding cost and a higher scale per farm. Meanwhile, due to different consumption habits, by-products are sold at a much lower price in the US than in China. Long-term, WHG should be able to expand global trading in other countries. Resume with Buy; target price at HK$11.50 We forecast the company to report a 5.2% sales CAGR and an 11.4% earnings CAGR in 2018-20. Our target price of HK$11.50 is based on a DCF approach (factoring in 9.3% WACC and 2% terminal growth). The stock now trades at 13.9x 2018E P/E with a dividend yield, compared with its global peers at 16.6x. We believe the risk-reward is attractive. USDA’s outlook, announced in 2018, is a potential catalyst. We resuming coverage with Buy. Downside risks: higher-than-expected pork price and food safety. This report marks the transfer of coverage to Mark Yuan; Anne Ling will remain as second analyst Forecasts And Ratios Year End Dec 31 2015A 2016A 2017E 2018E 2019E Sales (USDm) 21,209.0 21,534.0 22,129.1 23,957.8 24,979.1 EBITDA (USDm) 1,903.0 2,230.0 2,307.9 2,591.3 2,778.9 Reported NPAT (USDm) 786.0 1,036.0 1,085.3 1,251.7 1,354.4 Reported EPS FD(USD) 0.06 0.07 0.08 0.09 0.10 DB EPS FD (USD) 0.06 0.07 0.08 0.09 0.10 DB EPS growth (%) -9.9 30.9 4.7 15.1 8.1 PER (x) 10.6 10.2 16.0 13.9 12.8 EV/EBITDA (x) 5.7 5.3 7.8 6.7 6.1 DPS (net) (USD) 0.02 0.03 0.02 0.03 0.03 Yield (net) (%) 2.7 4.4 1.9 2.2 2.4 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close _____________________________________________ ___________________________________________________________________ Deutsche Bank AG/Hong Kong Distributed on: 27/02/2018 12:00:00 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. 7T2se3r0Ot6kwoPa 27 February 2018 Food & Beverage WH Group Model updated:27 February 2018 Fiscal year end 31-Dec 2014 2015 2016 2017E 2018E 2019E Running the numbers Financial Summary Asia DB EPS (USD) 0.06 0.06 0.07 0.08 0.09 0.10 Reported EPS (USD) 0.06 0.06 0.07 0.08 0.09 0.10 Hong Kong DPS (USD) 0.00 0.02 0.03 0.02 0.03 0.03 BVPS (USD) 0.4 0.4 0.5 0.5 0.6 0.6 Food & Beverage Weighted average shares (m) 11,904 13,666 13,666 13,669 13,669 13,669 WH Group Average market cap (USDm) 8,685 8,172 10,248 16,860 16,860 16,860 Enterprise value (USDm) 12,335 10,920 11,920 18,044 17,456 16,851 Reuters: 0288.HK Bloomberg: 288 HK Valuation Metrics P/E (DB) (x) 11.7 10.6 10.2 16.0 13.9 12.8 Buy P/E (Reported) (x) 11.7 10.6 10.2 16.0 13.9 12.8 Price (26 Feb 18) HKD 9.65 P/BV (x) 1.53 1.32 1.75 2.43 2.14 1.90 Target Price HKD 11.50 FCF Yield (%) 9.5 10.7 13.0 6.5 6.6 7.3 Dividend Yield (%) 0.0 2.7 4.4 1.9 2.2 2.4 52 Week range HKD 5.94 - 9.74 EV/Sales (x) 0.6 0.5 0.6 0.8 0.7 0.7 Market Cap (m) HKDm 131,902 EV/EBITDA (x) 5.9 5.7 5.3 7.8 6.7 6.1 EV/EBIT (x) 7.1 7.2 6.4 9.4 8.0 7.2 USDm 16,860 Income Statement (USDm) Company Profile Sales revenue 22,243 21,209 21,534 22,129 23,958 24,979 WH Group is the largest pork company in China (through Gross profit 3,264 4,080 4,207 4,271 4,732 4,971 Shuanghui) and the US (through Smithfield), with a fully EBITDA 2,095 1,903 2,230 2,308 2,591 2,779 integrated model from hog production and slaughtering, to Depreciation 353 384 363 381 407 435 processing into fresh pork and branded meat products. Amortisation 14 12 14 14 14 14 EBIT 1,728 1,507 1,853 1,912 2,170 2,330 Net interest income(expense) -371 -219 -183 -162 -149 -142 Associates/affiliates 63 14 33 34 37 38 Exceptionals/extraordinaries 0 0 0 0 0 0 Other pre-tax income/(expense) 0 0 0 0 0 0 Profit before tax 1,420 1,302 1,703 1,784 2,057 2,226 Price Performance Income tax expense 448 307 465 487 562 608 Minorities 206 209 202 212 244 264 11 Other post-tax income/(expense) 0 0 0 0 0 0 9 Net profit 766 786 1,036 1,085 1,252 1,354 8 DB adjustments (including dilution) 17 19 18 18 18 18 6 DB Net profit 783 805 1,054 1,104 1,270 1,373 5 Cash Flow (USDm) 3 Cash flow from operations 1,560 1,613 1,850 1,571 1,617 1,749 Feb 16May 16Aug 16Nov 16Feb 17May 17Aug 17Nov 17 Net Capex -733 -737 -514 -473 -502 -523 WH Group HANG SENG INDEX (Rebased) Free cash flow 827 876 1,336 1,098 1,116 1,226 Equity raised/(bought back) 2,284 0 2 0 0 0 Margin Trends Dividends paid -191 -162 -638 -622 -543 -626 Net inc/(dec) in borrowings -2,751 -744 -1,004 -234 0 -284 12.0 Other investing/financing cash flows -10 197 302 12 15 20 11.0 Net cash flow 159 167 -2 254 588 337 10.0 Change in working capital 227 191 -145 -126 -302 -317 9.0 Balance Sheet (USDm) 8.0 Cash and other liquid assets 1,000 1,154 1,190 1,444 2,032 2,352 7.0 Tangible fixed assets 4,582 4,674 4,529 4,587 4,655 4,716 14 15 16 17E 18E 19E Goodwill/intangible assets 3,789 3,731 3,660 3,656 3,642 3,628 EBITDA Margin EBIT Margin Associates/investments 830 591 214 214 214 214 Other assets 4,519 4,151 4,018 4,319 4,822 5,160 Growth & Profitability Total assets 14,720 14,301 13,611 14,219 15,365 16,071 Interest bearing debt 4,650 3,902 2,862 2,628 2,628 2,344 120 25 Other liabilities 4,020 3,696 3,711 3,878 4,071 4,068 100 20 Total liabilities 8,670 7,598 6,573 6,506 6,699 6,412 80 Shareholders' equity 5,130 5,763 6,316 6,946 7,872 8,851 60 15 Minorities 920 940 722 767 794 808 40 10 20 Total shareholders' equity 6,050 6,703 7,038 7,713 8,666 9,659 0 5 Net debt 3,650 2,748 1,672 1,184 596 -8 -20 0 14 15 16 17E 18E 19E Key Company Metrics Sales growth (%) 97.7 -4.6 1.5 2.8 8.3 4.3 Sales growth (LHS) ROE (RHS) DB EPS growth (%) na -9.9 30.9 4.7 15.1 8.1 Solvency EBITDA Margin (%) 9.4 9.0 10.4 10.4 10.8 11.1 EBIT Margin (%) 7.8 7.1 8.6 8.6 9.1 9.3 70 20 Payout ratio (%) 0.0 28.0 44.0 30.0 30.0 30.0 60 ROE (%) 21.2 14.8 17.5 16.6 17.1 16.4 50 15 40 Capex/sales (%) 3.3 3.5 2.4 2.1 2.1 2.1 30 10 Capex/depreciation (x) 2.0 1.9 1.4 1.2 1.2 1.2 20 Net debt/equity (%) 60.3 41.0 23.8 15.4 6.9 -0.1 10 5 Net interest cover (x) 4.7 6.9 10.1 11.8 14.5 16.4 0 -10 0 Source: Company data, Deutsche Bank estimates 14 15 16 17E 18E 19E Net debt/equity (LHS) Net interest cover (RHS) Anne Ling +852 2203 6177 [email protected] Page 2 Deutsche Bank AG/Hong Kong 27 February 2018 Food & Beverage WH Group Investment thesis Outlook In the near term, we expect expanding margin in the US and China, helped by Figure 1: China hog price vs WHG a declining hog price in 2018.
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