Ignore performance obstacles, WH Group's market value doubled in three years.

The basic fundamentals are hindered, income growth has stagnated, and profits have fluctuated significantly, but the market value of WH Group (00288) has risen against the trend. What is the logic behind this? It is understood that WH Group recently released its quarterly report, showing that after fair value adjustments, it achieved revenue of $6.554 billion, a 6% year-on-year increase, and a net profit attributable to shareholders of $380 million, a 18.3% year-on-year decrease. However, over the past three years (2022-2024), the company's performance has been weak, with a declining trend in revenue and significant fluctuations in net profit, and a low profit margin, which was 5.8% in Q1 of 2025. Despite the performance adjustments over these three years, the company's market value has continued to rise year after year, increasing by 48.7% from 2022 to 2024, and another 23% from the beginning of 2025 to now, with a total increase of 41.83 billion Hong Kong dollars, doubling from its low point. During this period, the capital market investment environment was not good, the Hang Seng Index declined, and sector funds were scarce. Under the loss effect, the company was able to enter an independent trend, mainly benefiting from its low valuation. The price-to-book ratio is less than 1, and far below the industry average, coupled with optimism from institutions and increased capital from major investors, even though the fundamentals are hindered, it provides a high safety margin for the return of valuations. Performance slightly fluctuates, capacity utilization is insufficient WH Group's main products include meat products and pork products, contributing over 90% of total revenue. The main markets are China, Europe, and North America, with a large reliance on the Chinese and U.S. markets. Due to global consumer weakness and the China-U.S. trade friction, the performance has been affected. Looking at the past three years, in 2024, the company's meat products and pork products revenue were $13.655 billion and $10.343 billion, respectively, which represented a 6.2% and 12.3% decline compared to 2022. Business revenue contribution has been relatively stable, accounting for 52.64% and 39.87%, respectively, totaling 92.51%. In the market, both products have shown a declining trend in sales in China and North America. Meat products experienced a significant decline in China, but showed strong growth in the European market, with a 24.7% increase in revenue from European meat products in 2024, maintaining double-digit growth over the past three years. In Q1 of 2025, the European meat products market continued to grow, with sales rising by 9.9%, but overall business revenue declined by 2% due to the decline in China and North America. The pork business in the three major markets saw growth driven by cyclical demand, leading to a 14.2% increase in overall business revenue and a recovery of 6% in total revenue. Due to changes in revenue structure, meat products' profits declined, but pork products turned losses into profits, driving an increase in operating profits by 19%. It is worth noting that WH Group's production capacity is distributed in China, North America, and Europe, with meat product production capacity mainly concentrated in China. By 2024, the total production capacity was 3.05 million metric tons, with China accounting for 68.2%. In 2025, the Chinese market has weakened consumption, with a capacity utilization rate of less than 79%, which continues to significantly affect performance in Q2. The total pork production capacity was 607.9 million heads, with China and North America accounting for 41.5% and 50.5%, respectively. China's capacity utilization rate for pork is less than 50%, but the North American pork market has performed well this year, providing some offset to the decline in meat products. There is room for capacity release, but the premise is the support from the demand side. Based on the current consumption environment, both for meat products and pork products, the outlook for Q2 this year is not very optimistic. Although the fundamentals are hindered, the valuation continues to return Firstly, there is uncertainty in the "quantity-price" relationship. In the Chinese market, the output of meat products and pork products declined in 2024, with prices falling, but both experienced some growth in Q1 of 2025, although it was only a low single-digit growth. In terms of pork, the inventory of live pigs increased by 2.2%, and the slaughter volume remained high, with limited demand absorption and significant price resistance. Recently, live pig futures prices have fallen sharply, which is expected to bring some price pressure to pork in Q2. The Chinese market accounts for over 30% of WH Group's revenue share, and the uncertainty of "quantity-price" has a significant impact on its performance. Furthermore, in the North American market, although the pork prices in Q1 were impressive, the performance of meat products was not good, and the two products' performance was relatively balanced, limiting the impact on the performance growth afterward. Profitability is sensitive to prices, and a downward trend in pork prices may weaken the business profits in Q2. Secondly, the U.S.-China trade frictions have become a key variable. The trade war initiated by the Trump administration in the United States has brought significant uncertainty to global trade. Some products have entered the tariff war list, leading to price pressures that may cause a cliff-like decline in the supply side. With import substitution, the competition pressure on localized production capacity is also increasing. Both China and the United States are WH Group's core markets and are significantly affected, potentially weakening the growth levels in the target markets. However, WH Group has a strong risk resistance capability. On one hand, the company has abundant financial reserves, with cash and cash equivalents of $2.055 billion USD as of the end of 2024, and short-term bank debts of $1.054 billion USD, ensuring a high degree of financial security. The interest-bearing debt ratio is 16.7%, which has been at relatively low levels in the past. In addition, in Q1 of 2025, the company's asset-liability ratio was 48.6%, an improvement of 2.3 percentage points compared to the end of last year. Despite the hindrance of the WH Group's fundamentals, the company still maintains stable dividends every year with its strong cash flow. According to data from Oriental Choice, the company has distributed dividends over 20 times since 2011, with a cumulative dividend ratio exceeding 41%. This year, special dividends of HK$0.18 per share and final dividends of HK$0.4 per share will be distributed in March and May, with a total dividend yield exceeding 8%. The generous dividend distribution has attracted many conservative investors and gained the confidence of institutions. CICC's research report is optimistic about the development of WH Group and maintains an outperform industry rating, with a target price of HK$8.56 per share; BofA Securities' research report believes that the company's first-quarter performance basically meets the bank's expectations. The better-than-expected performance in the U.S. market helps offset the underperformance in the Chinese market, reiterating a "buy" rating with a target price of HK$8.2. UBS has slightly raised its earnings forecast for this year and next year and raised its target price from HK$7.4.Hong Kong dollar raised to 7.6 Hong Kong dollars.In summary, WH Group's performance has declined in recent years. Although it achieved growth in the first quarter of 2025 mainly driven by pork and the US market, it still faces significant challenges in the second quarter, including uncertainties in "quantity and price" and the impact of the Chinese and American markets. However, the company's market value has been driven higher by factors such as being a leading player in the industry, stable dividends, positive institutional outlook, and low valuation. Currently, its price-to-book ratio is 1x and its price-to-earnings ratio is 7x, indicating it is still undervalued. The company is still in the process of valuation regression, with performance challenges having a relatively weak impact on its market value. Additionally, WH Group recently spun off its North American business unit, Smithfield, which is now independently listed on the NASDAQ Global Select Market. This spin-off listing will provide the subsidiary with easier access to financing channels, improve decision-making efficiency, accelerate development opportunities, attract global investors, and further enhance the valuation of the parent company.