WH Group: Neglected Stock with Growth Opportunity

Scott Phillips presented his in-depth investment thesis on WH Group (Hong Kong: 0288) at Best Ideas 2017.

WH Group is the world’s largest hog producer and pork processor with 60% of revenue based in the U.S. and 33% in China. Trading at 11.2x EPS and 6.7x EV/EBITDA, the shares trade at 23% and 22% discounts, respectively, to global peers. These discounts come despite the firm possessing leading market share, and rising levels of profitability during the past few years that are owed to competitive advantages, including strong brands and a unique cross-border hog price arbitrage between its U.S. and China-based operations, that both have spurred WH Group’s rising margins and market share gains. The company has deleveraged its balance sheet since its 2014 combination of Smithfield Foods and Shanghui Development, and is now using its healthy cash flows (8.1% FCF Yield vs. 3.5% peers) to expand its domestic Chinese production through the import of Smithfield’s high-quality U.S.-based hog supply now being processed in a new Western-style facility constructed in the mainland of China to offer Smithfield branded products. The firm’s recently added Smithfield-branded offering produced in China complements Shanghui Development’s traditional Chinese premium products, where it already enjoys leading market share across its 849,000 points of sale. Scott believes the shares remain too heavily discounted and do not reflect the operating improvements already experienced to date, much less future growth opportunities.

About the instructor:

Scott Phillips is portfolio manager and head of research at Templeton and Phillips Capital Management, LLC. Prior to working with Templeton and Phillips Capital Management, LLC, Scott Phillips founded Cumberland Capital Corp, located in Chattanooga, TN. Founded in June 2004, Cumberland Capital provided equity research services to Green Cay Asset Management, a hedge fund management company located in Nassau, Bahamas. In this capacity with Cumberland Capital, Scott was the lead research analyst on the Siebels Hard Asset Fund a long/short equity fund managed by Green Cay Asset Management. In addition to consulting on this fund Scott also provided equity recommendations for the Green Cay Emerging Markets Fund. Prior to consulting Green Cay’s funds Scott was employed as a research analyst with Green Cay beginning in January of 2004. Before joining Green Cay, Scott was an equity research associate analyst with SunTrust Robinson Humphrey (including its predecessor companies) in Atlanta GA from January of 1999 to December of 2003. Scott co-authored with Lauren Templeton of the book “Investing the Templeton Way” released in 2008 by McGraw Hill. Scott is also the author of “Buying at the Point of Maximum Pessimism” a book on forward looking investment themes published by the FT Press in 2010. In addition to these books, Scott co-authored a revision of William Proctor’s 1983 biography of Sir John Templeton titled “The Templeton Touch” released in December 2012. Scott is a member of the John Templeton Foundation and a trustee with the Templeton Foundation Inc. Scott received his B.A. from the University of the South.

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