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Fitch Assigns WH Group First-Time 'BBB+' Rating; Outlook Stable
October 11, 2016 / 1:32 AM / in a year

Fitch Assigns WH Group First-Time 'BBB+' Rating; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, October 10 (Fitch) Fitch Ratings has assigned China-based pork processor WH Group Limited (WH Group) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BBB+' and a senior unsecured rating of 'BBB+.' The Outlook for the IDR is Stable. WH Group's ratings are supported by the company's leading market position in both China and the U.S., stable and growing demand for pork and pork products, as well as the geographical diversification and synergies between the U.S. and China operations. WH Group's ratings are also supported by its healthy financial profile, as the company has reduced its leverage over the past two years. However, the ratings are constrained by the cyclicality and lower margins of the protein industry and the limited product diversification. KEY RATING DRIVERS Strength from Market Leadership: WH Group's China subsidiary, Shuanghui Development (Shuanghui), is the leading pork and packaged meat producer in the country and the "Shuanghui" brand is a household name in China. The China business is mainly driven by the packaged meat segment, where the company had 18.9% of the market by revenue in 2015. Its EBIT margin is in the high teens due to the strong brand and comprehensive distribution network. The US business, Smithfield, is the largest pork producer in the US. Smithfield's margins are relatively weak (low single-digit EBIT margins) due to a larger exposure to the upstream hog-rearing business, but this is mitigated by its fully integrated operations and strong distribution network. Geographical Diversification and Synergies: Fitch views WH Group's China and US businesses as complementary to each other. Smithfield started exporting a small amount of fresh pork to China in 2013 after it was acquired by WH Group. Pricing has been favourable for Smithfield and the move also has helped to reduce excess supply in the US. In addition, some parts of the pig, such as the innards, have little value in US but are commonly consumed in China. The China and US pork markets have different supply-demand dynamics, so the geographical diversification also helps to reduce earnings volatility on a consolidated basis. Strong, Stable Demand: Pork and pork products tend to enjoy stable demand with limited sensitivity to economic cycles. In addition, per capita meat and pork consumption in China is only half of that in Hong Kong and US, suggesting further room for demand growth as income levels rise. In the near term, the main growth opportunities are in Shuanghui's packaged meat segment, where Fitch expects high-single-digit revenue growth in the next few years, driven by demand for higher quality products. Healthy Financial Profile: WH Group's leverage was relatively high immediately after acquiring Smithfield. However, the company has substantially reduced its leverage over the past two years due to its strong FCF generation and an IPO in 2014. FFO-adjusted net leverage was a healthy 1.9x in 2015, and Fitch expects it to fall below 1.0x by the end of 2018. WH Group had ample liquidity at the end of 2015, with USD1.1bn in cash and USD397m in marketable securities, which are more than sufficient to cover its current borrowings of USD370m. Although Shuanghui is separately listed on the Shenzhen Stock Exchange, Fitch assesses WH Group on a consolidated basis as the company is able to access Shuanghui's cash flows via dividends. Shuanghui historically distributed approximately 90% of net profits as dividends. Sector Exposure Constrains Rating: WH Group's ratings are constrained by the cyclicality and lower margins of the protein industry. WH Group's exposure to a single protein also constrains the rating at the current level even though it is diversified across different countries. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - 5%-6% revenue growth in China and 2% revenue growth in US in 2016-18 - 9%-10% consolidated EBITDA margin in 2016-18 - Capex of USD400m-600m per year over 2016-18 - 30% dividend pay-out ratio RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to a downgrade include: - FFO-adjusted net leverage sustained above 2x - FCF margin sustained below 2% (end-2015: 3.5%) - EBITDA margin sustained below 8% - Sustained decline in revenue or market share in key markets Positive: No positive rating action is envisaged until the company significantly diversifies its products and/or geographical markets. Contact: Primary Analyst Yee Man Chin Director +852 2263 9696 Fitch (Hong Kong) Limited 19F, Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Laura Long Analyst +86 21 5097 3019 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Date of Relevant Rating Committee: 13 September 2016 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1012915 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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