Yum China: A pioneer in domestic catering. Steady progress After more than 30 years of development, Yum China has become the largest domestic restaurant chain, operating well-known brands such as KFC, Pizza Hut, Taco Bell, Little Sheep, Huang Jihuang, Lavazza, etc.; by the end of 2023, it was operating more than 14,000 restaurants in more than 2,000 towns across the country. In September 2023, the company launched the RGM2.0 strategy, shifting the strategic focus to growth, and set a three-year goal. It plans to reach 20,000 stores by 2026, striving to achieve double-digit compound annual growth in earnings per share in 2024-2026, and return $3 billion to shareholders.
Industry: The ocean leaps on fish, and the sinking market becomes the main battleground
The restaurant industry recovered rapidly after the epidemic, and the market size surpassed 5 trillion yuan in 2023, a record high. From the perspective of both supply and demand, Western-style fast food and freshly ground coffee are high-quality food and beverage segments. On the one hand, they have a large audience and a high degree of standardization, which can give full play to supply chain advantages and scale advantages, and are expected to nurture large-scale leaders. In the current macroeconomic environment, quality-price ratio, localization, and declining market have become key words in the development of the catering industry, and efficiency, innovation, and scale have become decisive strategies for catering companies.
Future Highlights: Combining Certainty and Growth
On the one hand, the company has a stable and efficient supply chain, a comprehensive and in-depth digital system, and localized products and marketing. While promoting sales growth, the company also improves operational efficiency and brings certainty in performance. On the other hand, the company's main brands, KFC and Pizza Hut UE, are healthy, and their store strategies are flexible and varied, and are expected to further encrypt and sink. At the same time, the emerging brand Lavazza positions authentic Italian coffee, and its development potential has yet to be unleashed, which together brings about growth in performance. Furthermore, the company continues to give back to shareholders, accumulating nearly $3 billion in cash dividends and share repurchases over the past 7 years, and plans to further increase the scale of dividends and share repurchases to $1.5 billion in 2024.
Investment advice
We expect the company's revenue in 2024-2026 to be US$120.03/132.92/US$14.679 billion, respectively; net profit to mother will be US$8.94/10.03/110 billion, respectively, +8.1%/+12.2%/+9.7% year-on-year; EPS will be US$2.27/2.55/2.79, respectively, and the latest stock price (closing price on April 8, US$38.14/exchange rate of 1HKD=0.13USD) corresponds to PE 17/15/14X, respectively. Covered for the first time, the company was given an “increase in weight” rating.
Risk warning
Industry competition intensified, food safety risks, store expansion fell short of expectations, and the development of emerging brands fell short of expectations.