Description
WH Group Ltd. (288 HK)
Analysis as of 1/23/2015
SUMMARY
WH Group is the #1 pork supplier globally, with primary end markets in China and the US. Since its IPO in August 2014, its share price has languished due to poor Q3 earnings results in China, governance actions which have made investors nervous, and high perceived leverage from its Smithfield Foods acquisition. The addressable near-term factors have begun to abate, however, as debt is being repaid through the strong cash flow generation of the underlying businesses and recent governance actions have been increasingly shareholder friendly.
The long-term performance of the stock is premised on growth in China, driven by demographic trends of increasing protein consumption and shifting consumption of higher margin processed products, as well as the potential for producer consolidation and import opportunities. While the company will continue to be subject to the cyclicality typical of agricultural firms in the medium term and the global macro environment, the risk/reward proposition is attractive at current levels and we estimate there is 41% upside to the stock in the next 18 months, assuming normalized industry conditions.
Company Background
WH Group is a Hong Kong-listed company (Ticker: 288 HK, market capitalization of $8.3B) that is the largest pork producer globally, dealing in both fresh pork and packaged meat products. The company IPO'd in August 2014 at HK$6.20, but has since fallen 28% to HK$4.44, having touched a low of HK$3.75 at one point.
The company's holdings include:
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73% ownership of Henan Shuanghui, an A share-listed subsidiary (000895.SZ) which is the largest pork products supplier in the China
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100% ownership of Smithfield, which it acquired in September 2013 for $4.9B. Smithfield was formerly a publicly-traded US company and is the largest pork products supplier in the US
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Through its Smithfield acquisition, WH Group also holds a 37% ownership stake in Campofrio, the largest packaged pork supplier in Europe (Spain, France, Netherlands, Belgium, Portugal, etc.)
Approximately 80% of WH Group's shares are privately held by various private equity firms, most notably entities affiliated with China-based CDH. The company carries an estimated $5.1 billion in debt as of year-end 2014 (at 2.5x Debt/EBITDA), a significant portion of which represents acquisition financing from its Smithfield acquisition net of IPO proceeds used to pay down a portion the debt.
LINK TO ANALYSIS
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I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Improving corporate governance
Improving earnings profile
Recognition of cash flow generation potential
Paydown of debt and initiation of dividend