Introduction to this report:
The company has strong supply chain and operating capabilities, and steady performance growth, further improving shareholder returns through repurchases and dividends.
Summary:
Investment advice: Q4 performance slightly exceeded expectations, increasing the company's 2024-2025 net profit to mother of US$904/997 million, respectively; considering that the company will return US$3 billion to shareholders in the form of dividends and repurchases in 2024-2026, it is expected that the 2024-2026 EPS will be 2.24 (+0.01) /2.49/2.72 US dollars, respectively, +12%/+11%/+9%, corresponding PE to 19x/17x, respectively /16x. Maintain an increase in holdings rating.
Performance summary: Total revenue for the full year of 2023 is US$10.98 billion/+15% (excluding exchange rate +21%), net profit of US$827 million/ +87% (excluding exchange rate +97%). Among them, 2023Q4 revenue was US$2.49 billion/+19% (excluding exchange rate +21%), operating profit of US$110 million/+170% (excluding exchange rate +175%), net profit of US$97 million/+81% (excluding exchange rate +84%), and adjusted net profit of US$103 million/+96% (excluding exchange rate +100%).
The store network continues to expand, and restaurant profit margins are optimized. ① Store expansion: 2023Q4 net increase of 542 stores (KFC +379, Pizza Hut +110), net increase of 1697 stores for the full year of 2023 (KFC +1202, Pizza Hut +409). By the end of 2023, there were 10,296 KFC stores and 3,312 Pizza Hut stores. In 2024, the company plans to add about 1,500 to 1,700 net stores, with capital expenses of $700 million to $850 million. ② Same-store recovery: 2023Q4 same-store sales were +4% year-on-year (KFC +3%, Pizza Hut +6%), recovering to about 85% in the same period in 2019, down from Q3. Same-store sales were +7% year-on-year in 2023 (KFC +7%, Pizza Hut +6%).
③ Profit performance: The 2023Q4 restaurant's profit margin was 10.7% /+1.7pct (excluding subsidies and VAT effects, same below), of which KFC 12% /+0.6pct, mainly due to increased same-store sales, increased promotions, and rising wages; Pizza Hut 7.3% /+6.8pct, mainly due to increased same-store sales, increased efficiency, and lower rider costs. Restaurant profit margin for the full year of 2023 was 16.3% /+2.7pct (KFC 17.7% /+2.4pct, Pizza Hut 11.8% /+3.3pct).
Increase dividend payments and repurchases to improve shareholder returns. Yum China gave back approximately US$390 million to shareholders in the 2023Q4 in the form of share repurchases and cash dividends, giving back a total of US$833 million/ +25% to shareholders throughout the year. In 2024, the board announced a 23% increase in cash dividend per share of Yum China's common stock to $0.16, and plans to repurchase $1.25 billion of common stock in the US and Hong Kong in 2024.
Risk warning: Opening stores fell short of expectations, the same store declined sharply, consumer demand was weak, and industry competition intensified.