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Nikkei Markets

WH Group looks for markets to import pork amid epidemic

Company posts decline in first-half profit amid swine flu and trade war

China's WH Group imports pork from its American unit Smithfield Foods, but the trade war has made expanding of those imports difficult.   © Reuters

HONG KONG (Nikkei Markets) -- With the Sino-American trade war in its way, WH Group, the world's largest pork company, is looking for newer markets to source pork even as its U.S. subsidiary is faced with a surplus of livestock and raw meat.

The problem facing the company is unique. In China, the world's largest market for pork, an outbreak of the African swine fever has over the past year affected the population of hogs and raw meat availability at WH Group's facilities. In the U.S., the second-largest market, there is a surplus of livestock and meat but not enough demand. While WH Group has been importing pork from its American unit Smithfield Foods, the tariff war between the world's two largest economies has made an expansion of that trade difficult.

Company officials told reporters at a news conference on Tuesday that WH Group is looking to buy pork from markets other than the U.S. for processing in China, to benefit from an increase in market prices amid a gap in hog population. Europe, South America and Canada are among the potential markets for sourcing pork. The company is also looking to cut costs and improve the product mix to shore up profitability, while making efforts to prevent a further spread of the disease, they said.

"We are trying to increase the pork imports into China," Chairman and Chief Executive Wan Long said in Hong Kong. "We are under some impact from the trade war, but now we have come up with measures to control the impact, as well as the impact brought by African Swine Fever."

More than a million pigs have reportedly been culled in China since swine fever was first detected in China's Liaoning Province in August last year, before swiftly spreading nationwide. While the epidemic initially depressed demand for pork, prices have recovered over the past several months. For WH Group, which makes more money on processed products than on raw meat, the price increase of raw meat, alongside a shortfall in supply, has squeezed profit margins.

Earlier in the day, the company reported a 16.9% drop in first-half net profit to $463 million as costs increased while revenue fell marginally to $11.13 billion. Operating profit from the company's packaged meats segment, which accounted for 52.9% of the group's revenue, dropped 3.4% on rising raw material costs in China.

WH Group imports around 100,000 tons of pork a year into China from the U.S., according to company officials. The meat is mostly used for processing packaged meats.

Total pork production in China declined 5.5% in the first half, mainly because of the "overlay effect of the cyclical factor and the outbreak of African swine fever," the company said.

Hong Kong-headquartered WH Group, which began its journey about five decades ago in China as Luohe Cold Storage, adopted its current name in 2014 following its Smithfield acquisition.

In the six months ended June, the company earned about 57.9% of its revenue from the U.S. and 33.7% from China, with Europe contributing the rest. Operations in the mainland were more profitable, bringing in more than 55% of its operating profit, while U.S. operations contributed 38.4%.

While WH Group has raised the prices of finished product by a total of around 10% in the first half of this year, company officials said they will be circumspect in lifting prices any further in the second half.

"The price hikes we implemented and existing cost control measures should be above to cover any increase in costs," said Ma Xiangjie, president of WH Group's China operations. "My judgment is that pork prices are not likely to increase in the second half to the extent that we need to further raise prices of packaged meats."

Its shares fell 2% to HK$6.72 on Tuesday before the results were announced. The stock has risen more than 11% so far in 2019 amid rising pork prices.

-- Benny Kung & Lopamudra Bhattacharya

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