China’s top ‘butcher’ WH Group posts worse-than-expected profit as trade war hurts US business
The company says its US unit will increase exports to countries like Japan and South Korea as the trade war continues
WH Group, the largest pork producer in China and the world, reported worse-than-expected results for the first half of the year, with its US operations coming under pressure as trade tensions between the world’s two largest economies began to escalate.
The company reported a 7.7 per cent drop in net profit to US$514 million from US$557 million in the year-earlier period as its US and European operations were hurt by lower margins.
Revenue reached US$11.17 billion, up 4.8 per cent from US$10.66 billion after biological fair value adjustments, which is a way to measure value of biological assets including living plants and animals. The first-half revenue was lower than a Bloomberg analyst consensus estimate of US$11.24 billion in revenue.
“The company’s US and European operations were affected by the change in trade environment and industry dynamics,” said WH Group’s chief financial officer Guo Lijun in a press conference on Tuesday.
Guo said operating profit of the company’s US business dropped US$140 million to US$330 million, compared with the year-earlier period, with the fresh pork segment suffering an operating loss of US$15 million due to declining hog prices.
Hog prices in the US dropped 4.6 per cent during the first half, compared to the same period in 2017. In China, the fall was a bigger 23.8 per cent decrease, according to the company.
Overall fresh pork revenue slipped 1.1 per cent to US$4.6 billion, which was buffered by a 6.9 per cent rise to US$5.9 billion in packaged meat sales.
“I didn’t expect the performance of the company’s fresh pork segment to drop so much,” said Barney Wu, an analyst with Guotai Junan Securities.
“In the second half, this section should see some recovery, while the impact of the trade war should be absorbed by the company as well.”
Last year, the company’s US business contributed to more than half of its turnover, which was also double the amount from China. Packaged meats and fresh pork accounted for most of its revenue, while hog production and other business made up for less than a tenth of the amount.
One of the Chinese companies that had been on an overseas buying spree, WH Group made headlines in 2013 when it bought US-based Smithfield Foods, then the world’s largest pork producer, for US$4.7 billion. It has since been profiting from the US unit’s mid to premium-range products, including high quality sausages and bacon, which suited the appetite of China’s rapidly growing middle class.
Chairman Wan Long said the company had adjusted its export volumes to countries like Japan and South Korea.
“If the trade dispute drags on, we will continue to adjust our US operation’s export channels,” Wan said.
The company said it would limit hog production, “sensibly” develop fresh pork business while focusing on the expansion of the packaged meat segment, as well as “accelerate the company’s pace of acquisitions in Europe”.
WH Group’s shares have lost 36.8 per cent since March, when news of a potential trade war became widely reported. They closed up 0.5 per cent on Tuesday to HK$6.07.