Key points of investment
A catering aircraft carrier with first-class brands: As of 2019, Yum China was the largest catering company in China, with FY19 revenue/net profit of FY19 amounting to 8.8 billion dollars/700 million US dollars. The company owns many of the country's leading catering brands, including KFC, Pizza Hut, Taco Bell, Little Fat Lamb, Huang Jihuang, Coffii&Joy, and Oriental White Restaurant Brands and Lavazza. More than 9,900 restaurants cover 1,400+ cities in China.
KFC is the largest fast food brand in China, and Pizza Hut is the largest casual dining brand in China. The company's brands are well known and leading in scale.
Strong digitalization, distribution capabilities, supply chain and membership systems. Takeout: It has its own digital platform and application, and is the restaurant chain that accounts for the highest proportion of takeout sales in China (21%). The company's exclusive rider delivery capabilities are strong, and there is relatively little reliance on third parties. Digitalization: Leading the way in deploying proprietary programs, artificial intelligence menus, face payments, etc. to reduce costs and improve efficiency. Digital orders in 2019 accounted for about 55% of KFC and Pizza Hut's revenue, and 20H1 accounted for 80%. World-class supply chain: 25 logistics centers, 6 distribution centers and 2100+ cold chain carriers. Highly loyal members: 20H1 KFC/Pizza Hut members exceeded 240 million/75 million, contributing 63%/49% of sales. Member sales achieved double-digit growth in 20Q2.
Financial performance was steady, with net income/net profit CAGR of 7.4%/14.3% over the past three years. Through more than 30 years of development, the company's brand, management and supply chain have all matured, and the performance is steady. The company bucked the trend and expanded in the context of the pandemic and became the only profitable leading restaurant company. The company recorded operating profit/operating cash flow of $97/60 million in Q1 and $128/392 million in Q2, with abundant cash flow.
Investors are advised to “buy”: The total share capital of the company after issuing new shares is 4.2 billion shares, and the total market value is HK$173.04 billion based on the sale price of HK$412 (1.6% premium over US stock prices). Corresponding to the 21/22 market consensus expected PE 25.8/22 times, considering that the company's store size, brand awareness, marketing, supply chain management, product standardization, and innovative R&D capabilities are a model for Chinese food companies. We think the valuation is reasonable. After the company's listing, it will help it continue to expand its endogenous scale (the company expects the number of restaurants to exceed 20,000 in the future), empowering new brands, exogenous mergers and acquisitions of high-quality targets, and strengthening the supply chain and digital development. Investors are advised to “subscribe”.
Risk warning: food safety, repeated epidemics, significant fluctuations in raw material prices and rents, franchise mechanism management risks, termination or restriction of franchise agreements