Yum China is a leading domestic restaurant company. As of the end of 2023, the number of stores reached 14,644, covering more than 2,000 towns. The company has exclusive and authorized operation rights for the three brands KFC, Pizza Hut, and Taco Bell in the Chinese market, and fully owns Little Sheep and Huang Jihuang restaurant chains. At the same time, the company is also exploring and developing Lavazza coffee shops in China. Currently, the company operates under the “direct management+franchise” model, and the proportion of direct-managed stores reached 86.4% by the end of 2023. By brand, KFC and Pizza Hut are the two pillars of the company. At the end of 2023, KFC stores accounted for 70.3%, and Pizza Hut stores accounted for 22.6%.
Revenue & profit are growing steadily, and the UE model is healthy. The company's revenue grew steadily along with store expansion, and achieved revenue of US$10.978 billion for the full year of 2023; profitability was steady, the non-GAAP net interest rate stabilized between 7%-8% in 2016-2023, and achieved an overall restaurant operating profit margin of around 15% to 16% (with the exception of the special year 2020-2022). The UE model is healthy. Since 2016, the operating profit margin of KFC stores has remained stable at over 17% (except for the period 2020-2022), with a payback period of about 2 years; Pizza Hut also achieved a store operating profit margin of 11% or more in 2023, with a payback period of about 3 years.
Supply chain & digitalization build core competitiveness; keep pace with the times, become younger & more popular, and maintain brand vitality. We believe that Yum China's current industry-leading market size and brand influence is mainly reflected in continuous iteration of opportunities in line with the times and environmental development, rapid integration into the Chinese market through localization, and continuous refinement of the core competition of the supply chain and digitalization. Keeping pace with the times, popularization, and rejuvenation make the brand continue to revitalize.
By 2026, we will reach 20,000 stores and continue to give back to our shareholders. The company plans to reach 20,000 stores in 2026, serving 1/2 of China's population (currently covering 1/3 of the domestic population); KFC's annual net number of new stores will increase to more than 1,200 in the next 3 years, and Pizza Hut's net store opening will increase to 400-500 in the next 3 years.
Meanwhile, the company continues to give back to shareholders through “dividend+repurchase”, and plans to raise the dividend and repurchase scale to 1.5 billion US dollars in 2024, accounting for about 9% of the Hong Kong stock market value as of March 15. The company aims to give back 3 billion US dollars to shareholders in 2024-2026.
Continue to iterate and actively respond to industry competition. Competition in the industry is becoming increasingly fierce. KFC is opening stores faster, continuously promoting new products to attract customers, and broadening the price range. At the same time, it also promotes growth through “Crazy 4” marketing, “KCOFFEE,” etc., and actively responds to industry challenges. Pizza Hut's “Revitalization Plan” has shown results, improved product cost performance, and increased the proportion of “satellite stores” and “small stores” to respond positively to delivery trends in the pizza industry.
Investment advice: Yum China is a leading domestic restaurant with tens of thousands of stores, deep brand advantages, and industry-leading supply chain & digital capabilities. The company is making steady progress towards 20,000 stores in 2026; its KFC and Pizza Hut stores are expanding rapidly, which is expected to drive the company's revenue and profit growth. We expect the company's 2024-2026 net profit of US$894 million, US$1.02 billion, and EPS of US$2.27, US$2.59, and US$2.90, respectively, and the closing price PE of Hong Kong stocks on April 3 is 17/15/14 times, respectively. The company continues to give back to shareholders through “dividend+repurchase”, and its profitability has grown steadily, and for the first time, it has been covered with a “recommended” rating.
Risk warning: 1) Industry competition increases risk. 2) The sharp rise in raw material costs affects profit risk.
3) Consumption recovery falls short of expected risks. 4) Expanding the store falls short of the expected risk. 5) Food safety risks. 6) There is a risk that model splitting and calculation, such as the single-store model, may be inaccurate.