Incident Overview

The company announced results for the second quarter of 2024. 2024Q2 achieved revenue of 2.68 billion US dollars/ +1% (+4% year over year), net profit of 0.21 billion US dollars/ +8% (excluding exchange rate effects, +11% year over year), and adjusted net profit of 0.21 billion US dollars/ +7% (without exchange rate impact, +10% year over year). 2024Q2, the company gave back approximately $0.249 billion to shareholders in the form of share repurchases and cash dividends, with a cumulative return of 0.994 billion dollars to shareholders in the first half of the year.

Analytical judgment

Q2 Same stores are under pressure, and new store openings drive revenue growth

2024Q2, the company's overall sales, KFC/Pizza Hut system sales were +4%/+5%/+1% year over year, mainly due to the increase in same-store transaction volume and the contribution of new stores; same-store sales were -4%/-3%/-8% year over year. In terms of split price, KFC/Pizza Hut's unit price was -7%/-9% year over year, and transaction volume was +4%/+2% year over year. By expanding the price band and reducing delivery costs, Pizza Hut promoted customer traffic growth by introducing entry-price products such as pizza and pizza burgers. With 2024Q2, the company added a net of 401 stores (of which KFC/Pizza Hut added a net of 328/79 stores respectively), with a cumulative net increase of 779 in the first half of the year (including 635/192 net additions); by the end of June 2024, the total number of the company's stores reached 15,423, of which 10931/3504, respectively.

Pizza Hut restaurant profit margins increased, and the share of management expenses decreased

2024Q2, the company's operating profit margin was 9.9% /+0.2pct, and the company's overall profit margins of KFC/Pizza Hut restaurants were 15.5%/16.2%/13.2%, respectively, -0.6pct/-1.1pct/+0.8pct, respectively. The company continues to improve operational efficiency by simplifying menus and operating processes, and combining automation and artificial intelligence technology; 2024Q2, the company's management expense ratio is 5.0% /-0.8 pct, and KFC's gross margin/labor cost/rent and other expenses share -0.8 pct/+0.4 pct/-0.1 pct, respectively, mainly due to increased cost-effective products and rising wage costs, and Pizza Hut's gross margin/labor cost ratio/rent and other expenses, respectively -1.3 pct/-1.4pct/-0.7 pct.

The store guidelines remain unchanged throughout the year, and the new store model is expected to help improve store efficiency and look forward to the future. The company maintains its goal of adding about 1500-1,700 stores in a net year of 2024. Through a flexible store model, it continues to penetrate low-tier cities and strategic locations, and the capital expenditure is between 0.7-0.85 billion US dollars. At the same time, the company pioneered the launch of the KCOFFEE store and Pizza Hut WOW store side by side, which is expected to help improve the efficiency of single-store stores. Among them, KCOFFEE shares space and resources with KFC stores to provide cost-effective products, from 100 stores in March to about 300 in July; Pizza Hut WOW stores are relatively more convenient and casual, and the menu is more cost-effective, from the first store in May to more than 100 stores in July.

Investment advice

Taking into account the company's same-store performance since this year and the current macro-consumption environment, we lowered our previous profit forecast. The estimated revenue for 2024-2026 was 11.697/12.847/14.129 billion US dollars (the original forecast was 12.003/13.292/14.679 billion US dollars), and net profit to mother was 0.853/0.955/1.042 billion US dollars (the original forecast was 0.894/1.003/1.1 billion US dollars), respectively. The latest stock price (closing price of HK$252.80 on August 6, exchange rate of 1HKD=0.13USD) corresponds to PE 15/13/12X, respectively, maintaining the company's “gain” rating.

Risk warning

The macroeconomic economy is declining, industry competition is intensifying, food safety risks, and store expansion falls short of expectations.