WH Group - A Tale Of Two Companies For Less Than The Price Of One

Jun. 17, 2020 3:32 PM ETWH Group Ltd. ADR (WGHPY), WHGLY, WHGRF18 Comments

Summary

  • WH Group (SEHK: 288) consists of two principal subsidiaries: 100% of Smithfield Foods Inc. and 73.4% of Henan Shuanghui Investment & Development Co.,Ltd. (SZSE:000895).
  • SEHK: 288 has a market capitalization of $13.1 B USD while SZSE:000895 has a market capitalization of $19.2 B USD as at June 17, 2020.
  • At 73.4%, SEHK: 288's shareholding of SZSE:000895 would be worth $14.1 B USD, which is greater than the entire market capitalization of SEHK:288.
  • SEHK: 288 acquired Smithfield for $4.7 B USD in 2013. SEHK: 288's current valuation would imply an equity value of -$1.0 B USD for SEHK: 288's profitable Smithfield operations.
  • Based on Smithfield's 2013 valuation adjusted for inflationary growth, we expect SEHK: 288 to be worth $18.8 B USD or an upside of at least 43.5%.

I remember my high school Economics teacher always quoting an old adage "there's no such thing as a free lunch in this world." There may not be free lunches, but every once in a while, Mr. Market will present highly irrational market quotations on businesses for which astute investors can take advantage of. We believe this is the case with WH Group Limited ("WH Group" or the "Company") where Mr. Market is providing an opportunity to buy the parent for less than the market value of its subsidiary.

Company Background

WH Group was founded in 1958. It is the largest pork company in the world with operations in China, US and Europe. It is fully integrated with operations in hog production, fresh pork and packaged pork products. WH Group is comprised of two principal subsidiaries. WH Group owns 73.4% of Henan Shuanghui Investment & Development Co.,Ltd. (“Shuanghui” and “SZSE:000895”), which is the largest pork company in China. Shuanghui is listed on the Shenzhen Stock Exchange in China. In 2013, WH Group acquired Smithfield Foods Inc. (“Smithfield”) for $4.7 B USD. Smithfield is the largest pork company in the US and the producer of a variety of pork products including “Lunchmeat”, a line of deli meat products in reseal-able plastic tubs. The lion’s share of WH Group’s revenues are derived from its packaged pork products and its fresh pork products.

Figure 1 - Smithfield Lunch Meat

Source: Company Data.

Investment Thesis

WH Group currently has a market capitalization of $13.1 B USD, which is comprised of its 100% shareholding of Smithfield and 73.4% shareholding of Shuanghui. The market capitalization of Shuanghui can be determined based on its share price on the Shenzhen Stock Exchange, which is $19.2 B USD. Therefore, WH Group's shareholding of 73.4% would be worth $14.1 B USD on a pro-rata basis, which is greater than the entire market capitalization

This article was written by

Designated as a Chartered Business Valuator Prior work experiences include: - Business Valuator - Private Equity Search Fund Analyst - Endowment Fund Investment Analyst Masters of Accounting Graduate

Disclosure: I am/we are long SEHK: 288. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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