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

Rating Action Commentary

 

Source: Fitch Ratings

20 Jun, 2022

 

Fitch Ratings - Hong Kong - 20 Jun 2022: 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+'.

 

The rating affirmation is supported by WH Group's leadership in pork production globally, diversification across US, China and Europe, vertically integrated business model, low leverage profile and strong funding access. The Stable Outlook reflects our expectation that WH Group will maintain a healthy financial profile and low leverage in the medium term, supported by its strong US operation and recovery in the China operation.

 

Key Rating Drivers

 

Diversification Supports Business Stability: Fitch believes the diversification of WH Group's major operations across China, US and Europe will continue to offset single-market volatility. The company's operating EBITDA margin was steady at 8.5%-10% in 2016-2021, despite various external challenges, including the pandemic and volatility in regional pork markets. We also see strong synergies across its regional operations through cross-regional trade, which has provided physical hedging and benefited the group as a whole.

 

Low Leverage Profile: Fitch expects WH Group to maintain its current low leverage, based on the company's record of financial discipline. We forecast the company to maintain a prudent financial policy and modestly positive free cash flow (FCF) to keep its net debt over EBITDA ratio well within 2x in 2022-2025. We also believe the company will maintain a high coverage ratio, driven by its sizeable EBITDA generation.

 

China Operation to Stabilise: Fitch expects the margins in WH Group's China operation to stabilise from 2022, as the company's pork business recovers and the packaged meat business remains highly profitable. WH Group's Chinese pork segment, mostly under Henan Shuanghui Investment and Development Co., Ltd, had an operating loss of USD53 million in 2021 (2020: operating profit of USD271 million), due to expensive inventory procured overseas against a sharp drop in local pork prices in 2021.

 

The operating loss in the pork segment was offset by the operating profit of USD902 million in packaged meat in 2021, which benefited from low raw-material prices, a strong brand and an extensive distribution channel in China. Fitch also expects limited impact on the overall margin of the China operation from a moderate recovery in China hog prices.

 

Strong US Operation: Fitch expects WH Group's US operation, run by Smithfield Foods, Inc. (BBB/Stable), to benefit from continued recovery in general consumption and the food service sector, following a similar trend in 2021, when operating profit was USD919 million (2019: USD932 million). Fitch expects cost inflation to have a limited impact as the company's fully integrated model, from hog farming to packaged meat, can absorb and pass on some incremental cost. WH Group is also deploying staff to higher-margin products to ensure better utilisation of resources amid a tight labour market.

 

Weak EU Business: Fitch expects WH Group's EU operation to remain weak in 2022, but it may normalise from 2023 as the local pork market recovers. However, the EU operation should not materially affect the company's cash flow as it makes a small contribution. WH Group's pork business there faced grain price inflation and weak pork prices due to African swine fever in 2021. Fitch expects the EU pork industry to take time to absorb and adjust to the market imbalance. Volatility in the EU pork segment is partly offset by the stable performance of the packaged meat segment.

 

Facility Upgrade Capex: Fitch expects WH Group's capex to increase in 2022-2025, with an intensity rate of 3.7-4.8%, above that in 2021. This will be mainly driven by the US facility upgrade and maintenance, and completion of expansion in China for poultry and hog farming. WH Group will spend more in 2022 in the US due to some project delays in 2021, and we expect more upgrades and automation in the coming years. We expect high capex in the China operation to continue in 2022, after Shuanghui raised CNY7 billion of equity at end-2020, but capex should moderate from 2023.

 

Derivation Summary ...

 

Key Assumptions ...

 

RATING SENSITIVITIES ...

 

Best/Worst Case Rating Scenario ...

 

Liquidity and Debt Structure ...

 

Issuer Profile ...

 

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING ...

 

ESG Considerations ...

 

RATING ACTIONS ...

 

PARTICIPATION STATUS ...

 

APPLICABLE CRITERIA ...

 

APPLICABLE MODELS ...

 

ADDITIONAL DISCLOSURES ...

 

ENDORSEMENT STATUS ...

 

DISCLAIMER & DISCLOSURES ...

 

Solicitation Status ...

 

Endorsement Policy ...

 

more, including links, table

https://www.fitchratings.com/research/corporate-finance/fitch-affirms-wh-group-at-bbb-outlook-stable-20-06-2022