Yum China released its 2023 quarterly report. The company achieved revenue of US$2.49 billion in 4Q23, up 19% year over year, up 10-15%; adjusted net profit of US$103 million, up 96% year over year, higher than expected expectations of 45-55%; and diluted EPS of $0.23, up 77% year over year. Total revenue for 2023 reached $10.98 billion, up 15% year over year; adjusted net profit was $842 million, up 89% year over year; diluted EPS was $1.97, up 89% year over year.
Brief review and investment advice
Same-store sales have recovered about 85%, and store opening has surpassed previous guidelines. (1) System/same-store sales: 4Q23 overall, KFC, and Pizza Hut system sales each increased by 21%, 20%, and 24%, and same-store sales increased by 4%, 3%, and 6% respectively, and the same store sales were estimated to return to about 85% in 2019; overall, KFC, and Pizza Hut system sales increased 21%, 20%, and same-store sales increased 7%, 7%, and 6% respectively. (2) Restaurant size. At the end of '23, the total number of restaurants in the company was 14,644, with a net increase of 542 in the 4Q and a net increase of 1,677 for the whole year, exceeding the annual net target of 1,400-1,600 stores, and raised to 1500-1,700 in the 24-year guideline. By brand: KFC has 10,296 companies, with a net increase of 379 in the 4Q and a net increase of 1202 for the whole year; there are 3,312 Pizza Hut companies, of which there was a net increase of 110 in the 4Q and a net increase of 409 for the whole year. (3) Restaurant performance. 4q23 restaurant profit margin increased 0.3 pct to 10.7%. ① KFC: Restaurant profit margin was 12%, down 0.7 pct year on year; ② Pizza Hut: Restaurant profit margin was 7.3%, up 5.4 pct year on year. Restaurant profit margins increased by 2.2pct to 16.3% in 2023. ① KFC: Restaurant profit margin 17.7%, up 2 pcts year on year; ② Pizza Hut: Restaurant profit margin was 11.8%, up 2.6 pct year on year.
The membership system continues to drive growth. ① Members: At the end of 2023, the total number of KFC and Pizza Hut members reached 470 million+ (410 million + in the same period in '22), accounting for 65% of annual membership sales, an increase of 3 pcts over the year. ② Digitization:
In 2023, KFC and Pizza Hut accounted for 89% of digital order revenue, which was basically the same; in 4Q23, KFC and Pizza Hut accounted for 89% and 92% of digital order revenue, respectively. ③ Takeout: KFC takeout sales accounted for 36% of the year, 4Q23 accounted for 38%, and non-dine-in sales accounted for 66% of the year, a year-on-year decrease of 3 pcts; Pizza Hut's takeout sales accounted for 37% of the year, 4Q23 accounted for 40%, and non-dine-in sales accounted for 46% of the year, a year-on-year decrease of 6 pcts. Compared to the previous year affected by the pandemic, dine-in sales rebounded significantly in 2023.
The share of raw materials and employee costs increased, the share of property rent and other operating expenses decreased, and operating profit margin increased 2.6 pct to 4.7%. 4Q23, (1) Raw materials and consumables: increased 20.3% to US$760 million, accounting for 32.4% of restaurant revenue, an increase of 0.5 pct; (2) employee costs: increased 18.9% to US$680 million, accounting for 28.9% of restaurant revenue, an increase of 0.1 pct; (3) property rent and other operating expenses: increased 14.7% to US$650 million, accounting for 27.9% of restaurant revenue, a year-on-year decrease of 0.9 pct; (4) Management expenses: increased 5.5% to US$150 million, accounting for restaurant revenue 6.5%, a year-on-year decrease of 0.8 pct.
Strengthen repurchases and dividends, and have both growth and certainty. The company's cash dividends and share repurchases set the highest record since the spin-off listing. 4Q gave back approximately US$390 million to shareholders in the form of share repurchases and cash dividends, for a total of US$833 million for the whole year. Looking ahead, the company plans to: ① add about 1500-1700 stores on a net basis in 2024, reaching 20,000 stores by 2026; ② capital expenditure of approximately US$7-850 million in 2024; ③ increase the cash dividend per share by 23% to $0.16 and repurchase $1.25 billion of common stock in the US and Hong Kong through open market transactions; and give back at least US$3 billion to shareholders in the form of quarterly cash dividends and share repurchases in 2024-26.
Update your judgment on the company. We believe that the company will continue to expand its KFC and Pizza Hut stores steadily by introducing new and cost-effective products (net addition of about 1500-1700 new stores are expected in 2024), strengthening operational, digitalization, and supply chain barriers (estimated capital expenditure of about US$7-850 million in 2024), and is expected to further strengthen business resilience, business growth, and strategic moats through the R.G.M strategy.
Update profit forecasts and valuations. We expect the company's total revenue for 2024-2026 to be $11.739 billion, $12.679 billion, and $13.667 billion, up 6.9%, 8.0%, and 7.8% year over year; net profit to mother will be $896 million, $975 million, and $1.65 billion, respectively, up 8.3%, 8.8%, and 9.3% year over year; corresponding to EPS of $2.21, $2.40, and $2.62, respectively. Based on 20-25 times PE in 2024, calculate the reasonable value range of 44.1-55.2 USD/share, corresponding to HKD345.1-431.3 per share (calculated as 1HKD=0.1279 USD); maintaining the “superior to market” rating.
Risk warning. Risk of food safety issues, risk of termination of franchise agreements, risk of increased competition.