Fitch Affirms WH Group at 'BBB+', Outlook Stable

 

Source: Fitch Ratings

16 Jul, 2021

 

Fitch Ratings - Hong Kong - 16 Jul 2021: Fitch Ratings has affirmed Chinese pork producer WH Group Limited's Long-Term Issuer Default Rating (IDR) at 'BBB+'. The Outlook is Stable. We have also affirmed the senior unsecured rating at 'BBB+'.

 

WH Group's ratings are supported by its leadership in pork production globally, diversification across US, China and Europe, vertically integrated business model, moderate leverage profile and strong funding access. We expect the planned share buyback of up to USD2 billion to increase the company's leverage, but it should remain within our negative sensitivities of 2x. The Stable Outlook reflects our expectation that WH Group will stay on track for deleveraging, supported by improvement or recovery in its diversified operations.

 

KEY RATING DRIVERS

 

Slumping Pork Price Protects Margin: Fitch expects WH Group's Chinese operation under Henan Shuanghui Investment and Development Co., Ltd to benefit from lower raw-material prices and more supply, as China's hog and pork prices fell sharply in 1H21 following supply recovery. China's pork price fell by more than half by end-June from early January, as hog and sow inventory gradually returned to levels before the outbreak of African swine fever (ASF). We expect the lower pork price to help maintain the margin for the packaged-meat segment at around 20% in the next few years (2020: 20.7%).

 

WH Group's margin for the fresh-pork segment will be subject to the spread between hog and pork prices. Nevertheless, we believe the recovery in hog supply will improve the utilisation of WH Group's meat processing capacity, which will help maintain profitability. Overall, we expect WH Group's operating profit in China in 2021 to be similar to that in 2020.

 

Overseas Markets to Recover: We expect recovery in the US and growth in Europe for WH Group's subsidiary Smithfield Foods, Inc. (BBB/Stable). Recovery in the food-service sector will boost WH Group's overseas volume and profitability in 2021, with Covid-19-related costs budgeted at USD150 million in 2021 (2020: USD800 million). We expect WH Group's overseas operating profit to be over USD900 million in 2021, return to pre-pandemic levels in 2022 and rise thereafter. However, high feed costs, smaller spreads between hog and pork value and labour retention could pressure profitability.

 

Inventory to Ramp Up: Fitch expects WH Group to stockpile more pork in China and overseas. WH Group's inventory declined in 2020, as the company consumed its cheap stocks previously procured in China. We expect the company to expand inventory in China, as the pork price goes into a downcycle. The company's hog breeding business plan could also increase inventory from 2022. The overseas operations may also add to inventory in anticipation of demand recovery.

 

Major Capex Funded by Equity: WH Group's Chinese subsidiary Shuanghui Development issued CNY7 billion of shares in October 2020 and will use most of proceeds for capex in 2021 and 2022. WH Group plans to expand in poultry and hog breeding and spend USD1 billion in 2021 in China. We expect capex to increase in 2022 before declining from 2023. The new business may bring cash inflow and offer stable supply to its existing business. We forecast US and European capex at over USD400 million per year as large projects have been completed and spending will be mainly for facility renovation and upgrades.

 

Reduced Leverage Headroom: WH Group's FFO net leverage could increase materially to over 1.5x in 2021 (2020: 0.1x), after the share buyback is completed, but we expect the ratio to stay within 2x and to decline in the medium term, driven by strong operating performance. WH Group's free cash flow (FCF) could turn negative temporarily in 2021 due to high capex, but we expect FCF to return to positive afterwards. The company also has a proven record of deleveraging following the acquisition of Smithfield Foods in 2013.

 

DERIVATION SUMMARY

 

WH Group's credit profile is comparable with other 'BBB+' rated protein and packaged food peers. Its business profile is stronger than that of Chinese hog producer, Wens Foodstuff Group Co., Ltd. (BBB+/Negative), due to its operations in both the US and China, diversification in business lines and stronger brand recognition in the US and China. Wens has better protein diversification in both hog and boiler breeding. WH Group's EBITDA scale is similar to, but more stable than, that of Wens, although Wens' margin has been higher. WH Group's leverage is also expected to be lower than Wens' in the medium term.

 

The strong business profile of US protein peer, Tyson Foods, Inc. (BBB/Stable), is supported by its diversification across protein types, while WH Group's advantage is in its geographic diversification. WH Group is rated a notch higher, mainly due to lower leverage.

 

Netherlands-based dairy producer, Royal FrieslandCampina NV (RFC, BBB+/Stable), and WH Group have comparable business profiles, with strong brand awareness and geographic diversification. However, RFC has a moderately better product mix, while WH Group's financial profile is less leveraged and is better-positioned to deleverage in the medium term.

 

We deem the business profile of US based packaged-food company, Mondelez International, Inc. (BBB/Stable), as stronger than that of WH Group, given its strong brand image, broad product offering and global presence. However, Mondelez's higher leverage leads to a one-notch rating difference with WH Group.

 

Compared with protein producers rated 'BBB-' or below, WH Group outranks them in terms of its market positions in the US and China and brand image. It also has a healthier financial profile, with lower leverage and strong liquidity.

 

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