WH Group's Smithfield Listing Plan Fails To Excite Investors

Key Takeaways:

• WH Group is reportedly planning to list its U.S.-based Smithfield unit that it acquired for $4.7 billion in 2013
• Such an IPO, which could come as soon as early next year, is likely to get a tepid response from investors after Smithfield fell sharply into the red this year

By Doug Young 

If leading Chinese pork producer WH Group Ltd. (0288.HK) was hoping investors would go “hog wild” over plans to separately list its U.S.-based Smithfield unit as soon as early next year, it was probably quite disappointed. That’s because the company’s Hong Kong-listed shares barely budged at the end of last week after the Wall Street Journal reported WH Group was in talks to serve up Smithfield shares for U.S. investors about a decade after they delisted from New York.

Instead, WH Group’s shares continued to trade near all-time lows since their 2014 listing in Hong Kong. While the company is a global hog leader, its valuation has become quite the “dog” lately among its peers.

The stock now trades at a price-to-earnings (P/E) ratio of 6.9, which normally wouldn’t look too low for this kind of low-growth company in a very mature business. But Chinese peers Wens Foodstuff(300498.SZ) and Muyuan Foods (002714.SZ) trade quite a bit higher at ratios of 27 and 10, respectively. U.S. giants Tyson Foods TSN and Hormel HRL also trade notably higher at ratios of 49 and 20, respectively.

The Journal report says WH Group is currently working with investment banks on the Smithfield listing, hoping it will boost the company’s own sagging valuation in Hong Kong. WH Group’s U.S., Mexican and European operations, which comprise most of Smithfield’s operations, made up about two-thirds of the company’s revenue in the first half of this year.

Assuming Smithfield makes up roughly a similar percentage of WH’s market value would give the U.S. company a market cap of about $4.8 billion, which is roughly what WH paid for the company in 2013. But the actual value could be a bit lower since Smithfield is doing quite poorly at the moment, which is probably a major reason why WH Group is valued so lowly compared with its peers.

At a discounted valuation of $4 billion, a Smithfield listing could raise about $1 billion if WH sells 25% of the company. Of course, that’s a big “if” in the current choppy market for IPOs. And even if the market improves, WH Group could still find limited investor appetite in the U.S. for a money-losing pork producer.

Things were quite different when WH Group, then known as Shuanghui, sealed its purchase of Smithfield back in 2014. The deal was somewhat controversial due to its food security overtones, leading to some political pushback at the time. But it ultimately went through, and WH celebrated by listing its own shares a year later in Hong Kong.

That listing was initially greeted with healthy appetite from investors, who hoped that China’s huge pork market would welcome U.S. imports that could help to improve Smithfield’s performance. WH Group’s shares rose from their IPO price of HK$6.20 to as high as HK$9.60 in 2018 on such great expectations. But then the company’s China business took a hit in 2018 as China grappled with a national bout of African swine fever.

Crisis Passes

Smithfield actually benefitted during the outbreak by helping to fill the gap left by pork shortages in China. But at this point that crisis is largely over and the U.S. company’s exports to China have also plunged. WH Group’s stock has moved steadily downward since the swine fever crisis began, and at its Friday close of HK$4.35 is now down by more than half from its 2018 high.

With WH Group’s two main markets on opposite sides of the Pacific now largely back to normal, investors have decided they don’t really much prefer the company’s unique hybrid flavor of raising hogs and selling pork in the China and U.S. markets.

The company’s problems are largely concentrated in the U.S., though its China operation also looks slightly shaky lately due to its recent appetite for cash.

The company reported its overall revenue fell 2.1% year-on-year in the first half of 2023 to 31.1 billion yuan ($4.25 billion), including an 11% decline in the U.S. and a 3.4% drop in China. The company’s only saving grace came from Europe, where sales actually rose 21%.

WH Group’s profits looked much worse, falling by about 45% on both an operating and net basis. The company reported an operating loss of $409 million for its U.S. operations, reversing a $124 million operating profit a year earlier. It noted that the losses were largely the result of falling U.S. pork prices, which were down about 20% in the latest reporting period from a year earlier, combined with rising feed prices as a result of disruptions from the Russia-Ukraine war.

That kind of weak performance hardly looks promising for the Smithfield IPO, though it’s possible WH Group has other motivations for pursuing such a listing now besides just boosting its valuation. That leads into the second point we mentioned earlier, namely, that WH Group’s China operations appear to have developed a recent appetite for cash.

The company said it had $828 million in cash at the end of June, down by roughly 40% from the $1.39 billion it had just six months earlier at the end of last year. Its borrowings in China’s currency, the yuan, also nearly doubled to about 1 billion yuan at the end of June from 573 million yuan a year earlier. The rapid cash consumption appears to be coming from the company’s main China unit, Shuanghui, whose own latest report shows its cash dropped to 3.2 billion yuan at the end of June from 5.8 billion yuan six months earlier.

WH Group’s overall outstanding debt was largely unchanged at the end of June from six months earlier, so it’s not completely clear why the China unit was consuming so much cash. But regardless of the reason, the company could clearly use some cash right now to replenish its coffers.

At the end of the day, we honestly can’t see U.S. investors getting too excited about a Smithfield IPO next year, even if the stock market improves by then. That could ultimately derail such a listing, especially if WH Group has to slash both Smithfield’s market value and the size of the offering due to weak demand.