China Construction Bank International released a research report, announcing that WH Group (00288) plans to spin off Smithfield Foods' business in the United States and Mexico and list it separately on the NYSE or Nasdaq. The group has not yet set a timetable or listing valuation. Some consumer goods companies have already listed their subsidiaries in the United States, notable examples include Anta Sports (02020), which plans to list its subsidiary Amer Sports (AS US) in early 2024. The bank believes that the successful listing of subsidiaries will encourage Chinese consumer goods companies to follow suit, enhance their overseas influence, and lay the foundation for future global expansion.
According to company data, Smithfield's revenue declined by 10.1% and 8.1% year-on-year in the first quarters of 2023 and 2024 respectively. The revenue of the packaged meat business in the first quarter of 2024 improved somewhat, but the revenue of the pork business continued to decline. The operating profit margin (OPM) of Smithfield's product departments varies, with the operating profit margin of the packaged meat business being better than that of the pork business. In recent quarters, Smithfield's revenue from the pork business has been lower than that of its major US competitor Tyson Foods (TSN US), and its operating profit from the pork business has also been lower than Tyson's, which is also reflected in the performance of the operating profit margin. The bank believes that Smithfield needs to turn around to improve its listing valuation. The group mentioned that it is currently working hard to improve its North American farm portfolio. Targeted restructuring efforts will help simplify the operation of the pork business and may become a catalyst to improve the listing valuation.
The bank stated that it remains bullish on the group's potential financial improvement in the first quarter of 2024, the expected recovery of growth momentum, and the potential enhancement of the financial situation through the listing of Smithfield, but listing still faces uncertainties. Therefore, the target price based on discounted cash flow calculation (DCF) currently remains unchanged. The current target price is equivalent to 8.9 times/7.8 times the 2024E/2025E price-to-earnings ratio or 1.0 times/0.9 times the 2024E/2025E price-to-book ratio. Maintain a “buy” rating with a target price of HKD 6.6.