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Valuation review: Yum China's valuation anchor is KFC SSS. We reviewed the valuation of Yum China since its listing and came to the conclusion that Yum China's PE mainly anchors the marginal changes in KFC SSS. This article focuses on changes in KFC store efficiency and focuses on the following two topics of market concern:
Topic 1: What impact did Tustin's rise have on KFC?
First, we discussed Tustin's business model in depth and believed that its success came from: 1) Product:
Western-style burgers have become deeply entrenched in the hearts of the people after more than 30 years of market education. Tustin has successfully created a differentiated product with both taste and marketing selling points, and has the underlying attributes of an influencer hit. 2) Positioning:
The gap in the price band between McCann and Wallace accurately explores demand gaps & sniper user pain points, and achieves a balance of price, taste, and hygiene to a certain extent. 3) Marketing: With short videos as the core promotion position, all in Douyin & live streaming, the marketing style is advanced and novel. 4) Brand: Using Guochao aesthetics to successfully bind the brand image to Chinese culture deeply, compared to many mature fast food brands, Tustin has been completely updated.
Next, we investigate Tustin's future influence on KFC. We believe that Tustin's rise out of nowhere will inevitably have a negative impact on KFC, but the impact is relatively manageable. Tustin management took the initiative to cut Wallace's share, and the position/competitive relationship with KFC will gradually weaken in the future. The KFC store model is superior to its direct competitor McDonald's, and the advantage gradually expands as the line level declines.
Judging from the texture of the single-store model, Tustin = KFC > McDonald's > Wallace, KFC can still build a deep moat based on its high-quality model with high threshold, high profit, and fast return. Since 2023Q4, the efficiency of KFC, McDonald's, and Burger King stores have declined sharply. Tastin/Dexx has weakened slightly, and Wallace has accelerated its upward trend, showing that the trend of consumption downgrading is significant. All brands have been affected, indicating that the current pressure on KFC's store efficiency comes more from changes in the consumer environment.
Topic 2: How much does the increase in the share of small KFC stores affect overall store efficiency?
Since the increase in the share of small stores will lower the overall level of store efficiency, we tried to dismantle it. Assuming an average change of -1.0% in the same store efficiency from 2024-2026, combined with changes in the number of stores and the proportion of large and small stores in each tier city, it is estimated that KFC's overall store efficiency will be -3.5%/-2.6%/-2.4% over the next three years.
Investment advice: The company is a long-standing benchmark for localized Western-style fast food. Competition with emerging brands such as Tustin will gradually weaken. This round is more hampered by poor macro spending power, and the company's basic plate/moat/model texture is still extremely stable. Expect performance catalysts brought about by a recovery in consumption. The company's net profit for 2024-2026 is estimated to be 8.7/9.9/1.15 billion US dollars, corresponding to PE 14/12/10 times, respectively, maintaining a “buy” rating.
Risk warning: weak consumer demand; increased industry competition; food safety risks