Time to add more protein; resuming coverage with Buy

Deutsche Bank Markets Research Rating Buy Asia Hong Kong Consumer Food & Beverage Company WH Group Date 27 February 2018 Coverage Change Time to add more protein; resuming coverage with Buy Reuters Bloomberg Exchange Ticker 0288.HK 288 HK HSI 0288 ADR Ticker ISIN WHGLY US92890T2050 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 Well-positioned in pork price cycle; global trade profit to expand; Buy ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong 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. Price at 26 Feb 2018 (HKD) 9.65 Price target - 12mth (HKD) 11.50 52-week range (HKD) 9.74 - 5.94 HANG SENG INDEX 31,499 Mark Yuan Research Analyst (+852 ) 2203 6181 mark.yuan@db.com Anne Ling Research Analyst (+852 ) 2203 6177 anne.ling@db.com Price/price relative Performance (%) 1m 3m 12m Absolute 4.0 19.1 59.2 HANG SENG INDEX -5.0 5.5 31.4 Source: Deutsche Bank 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 increasing synergies within different subsidiaries; and third, product mix upgrade in China should drive sustainable sales growth. We believe the risk-reward for the stock is attractive at 13.9x 2018E P/E vs. 11.4% earnings CAGR in 2018-20. We resume coverage on the stock with a Buy. Declining hog price to drive margin expansion in near-term 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 Distributed on: 27/02/2018 12:00:00 GMT7T2se3r0Ot6kwoPa 27 February 2018 Food & Beverage WH Group Page 2 Deutsche Bank AG/Hong Kong Model updated:27 February 2018 Running the numbers Asia Hong Kong Food & Beverage WH Group Reuters: 0288.HK Bloomberg: 288 HK Buy Price (26 Feb 18) HKD 9.65 Target Price HKD 11.50 52 Week range HKD 5.94 - 9.74 Market Cap (m) HKDm 131,902 USDm 16,860 Company Profile WH Group is the largest pork company in China (through Shuanghui) and the US (through Smithfield), with a fully integrated model from hog production and slaughtering, to processing into fresh pork and branded