Key points of investment
23Q4 The company's performance and shareholder return plan all exceeded expectations. Under the current market value, the expected repurchase+dividend rate for 24 years exceeds 9%. We believe that Yum China is a scarce value stock with growth in the current environment. That is, a high repurchase dividend rate (over 9%) is the basis for shareholder returns, and the performance has the potential for double-digit growth. We valued 24-year net profit 22 times, with a target price of HK$376 and a current price margin of 21.8%, maintaining a “buy” rating.
Overview: Performance and shareholder return plans all exceeded expectations. The expected buyback and dividend rate in '24 was over 9% 23Q4, and Yum achieved revenue of US$2.49 billion (YoY +19%), exceeding expectations by 7.0%. KFC and Pizza Hut's revenue both exceeded expectations. Net profit of $97 million (YoY +81%), surpassed expectations by 51%, profit margin 3.9% (YoY +1.4pct). Profit exceeded expectations mainly because Pizza Hut's profit exceeded expectations, and rent and other controls at the overall cost level were better than expected.
The expected buyback + dividend rate for 24 years is as high as 9.2%. The 24-year repurchase amount increased from the previously announced US$750 million to US$1.25 billion (an additional US$500 million was repurchased on the Hong Kong Stock Open Market in 24Q1). Based on the market value of Hong Kong stocks of HK$125.3 billion (US$16.29 billion) on February 9, the repurchase rate was as high as 7.7%. In terms of quarterly dividends, the previous cash dividend of $0.13 per share increased 23% to $0.16 (starting 24Q1). Based on the closing price of Hong Kong stocks on February 9, the 24-year dividend rate is 1.5%. Overall, the expected buyback + dividend rate in '24 is as high as 9.2%.
According to the company's financial report, a net increase of 150-1,700 stores is planned in '24 (net increase of 1,697 stores in '23), and capital expenditure is between US$7-850 million (US$710 million in '23).
Revenue: Exceeded expectations by 7.0%; KFC unit prices stabilized month-on-month in 23Q4, Yum achieved revenue of US$2.49 billion (YoY +19%), exceeding expectations by 7.0%. Among them, KFC's revenue was US$1.87 billion (YoY +18%), exceeding expectations by 4.6%; Pizza Hut's revenue was US$496 million (YoY +23%), exceeding expectations by 5.5%.
23Q4 system sales increased 21% year over year, of which 12% came from net store increases, 4% same-store sales growth, and a low base due to temporary store operations in the previous year. Among them, KFC system sales also increased 20% (same store +3%, store +12%), and Pizza Hut system sales also increased 24% (same store +6%, store +12%).
Yum's overall same-store sales increased 4% in 23Q4, exceeding consistent expectations of 3.24%. Among them, KFC's same-store growth was 3%, which is roughly in line with expectations. In terms of volume price, KFC's volume increased by 16%, and the price decreased by 11%. According to the company's public results meeting, the 23Q4 KFC customer unit price was 39 yuan, the same as the 23Q3 customer unit price, and the customer unit price stabilized month-on-month; Pizza Hut's same store increased by 6%, exceeding the 4.7% consensus forecast. In terms of volume price, Pizza Hut increased 15% in volume and decreased in price by 8%.
The number of stores reached 14,644 in 23Q4, a net quarterly increase of 542. In 23Q4, the number of KFC stores reached 10,296, a net quarterly increase of 379; the number of Pizza Hut stores reached 3,312, a net quarterly increase of 110.
Profit: 51% higher than expected, mainly because Pizza Hut's profit exceeded expectations and cost-level rent control was better than expected
Yum's net profit was $97 million (YoY +81%), exceeding expectations by 51%, and profit margin 3.9% (YoY+1.4pct).
Store-level profit of US$253 million, with a profit margin of 10.7% (YoY +0.3 pct, excluding an increase of 1.7 pct in temporary subsidies for the same period of the year), exceeding expectations (expected profit margin of 9.6%). KFC store-level profit of US$220 million, profit margin of 12.0% (YoY -0.7 pct, excluding impact of 0.6 pct), lower than expected (expected 12.4%), mainly due to enhanced promotion and increased labor costs; Pizza Hut store-level profit of 37 million US dollars, profit margin 7.3% (YoY +5.4 pct, excluding 6.8 pct), which greatly exceeded expectations (expected 5.2%), mainly due to same-store growth exceeding expectations and favorable raw material prices. We believe that through the “Revitalization Plan,” product updates and sales growth have entered the norm, and profit margins are expected to increase in the future. Currently, Pizza Hut's profit margin is still far from KFC.
By cost: raw material cost is US$760 million (YoY +20%), cost control is 10.35% lower than expected, raw materials account for 32.4% of restaurant revenue (YoY +0.5pct); labor cost is US$680 million (YoY +19%), cost control is 4.0% lower than expected, and labor costs account for 28.9% of restaurant revenue (YoY +0.1pct); of these, KFC's labor cost is US$520 million (YoY +20%), and cost control is lower than expected 9.3%. Rent and other costs were $650 million (YoY +15%), cost control was better than expected 0.9%, and rent and other costs accounted for 27.9% of restaurant revenue (YoY -0.9pct).
Investment advice
From a fundamental perspective, the company's demand is steady and the pattern is manageable. Against the target of 20,000 stores in '26, the three-year compound growth is expected to reach double digits; from a shareholder return perspective, the company places emphasis on shareholder returns and drastically increases repurchases and dividends this quarter, with an expected repurchase+dividend rate of over 9% in 24; from a valuation perspective, the current valuation is at the bottom of the historical valuation, corresponding 18.4 times adjusted net profit in 24 years. Revenue for 2024-2026 is estimated at US$121/134/17.7 billion, respectively, and adjusted net profit of US$90/10.1/1.11 billion. The net profit for 24 years is estimated to be a reasonable valuation of US$19.9 billion (HK$152.85 billion, HKD: USD 0.13), target price of HK$376, with a current price space of 21.8%, maintaining a “buy” rating.
Risk warning
Competition exceeded expectations; the recovery in consumption fell short of expectations.