WH Group (00288), a company with a narrow-moat status, has reported disappointing financial results for the second quarter of the year, with its operating profit being adversely affected by a loss in its U.S. hog operations. Although there were positive developments in the packaged meat business, which outperformed expectations, the overall weak performance led to a reduction in sales and operating profit projections for 2023. The company’s management anticipates a moderate rebound in hog prices in China during the latter half of the year. The fair value estimate for WH Group has been marginally adjusted to HKD 7.4 per share, reflecting price/earnings and EV/EBITDA ratios of 11 and 6, respectively, for the year 2023. The challenging outlook for the U.S. hog business is expected to continue affecting investor interest in the company, although the current share price may already incorporate many of these challenges.
In the second quarter, WH Group’s revenue experienced a 6.9% decline compared to the previous year, mainly due to subdued hog prices in both China and the U.S., as well as currency fluctuations. The operating profit recorded a significant 52% decrease year-on-year, with the U.S. hog operations breaking even during this period. The pork segment in the U.S. reported an operating loss of USD 277 million, which completely offset the downstream profit. Notably, the downstream profit achieved a historic high operating margin of 14.8%. In China, the company faced headwinds from low hog prices impacting upstream profits, but it managed to achieve a moderate increase in the margin for the packaged meat segment by 40 basis points compared to the same quarter in the previous year.
As a result of these challenges, there has been a downward revision of full-year revenue and operating profit estimates by 4% and 2%, respectively. WH Group is taking measures to address the situation, including reducing its hog production capacity in the U.S. to around 15 million hogs by the end of 2023 from a previous figure of 17.5 million. The company also anticipates a lower operating margin for packaged meat in the U.S. for the remainder of the year due to heightened market competition. While these adjustments indicate a challenging road ahead, the company remains committed to navigating these obstacles and improving its financial performance.
