Yum China reported 2Q24 revenue of US$2.68bn (+1% YoY) and core operating profit of US$275m (+12% YoY), in line with our expectation. We maintain 2024E EPS forecast of US$2.14, 2025E forecast of US$2.36, and 2026E forecast of US$2.56. Considering the consumption sentiment, we lower our valuation, lower target price from HK$450 to HK$408, and with 61% upside potential, we maintain Buy rating.
Healthy store payback. In 2Q24, the company opened a net of 401 new stores. The total number of stores reached 15,423, including 10,931 KFC outlets, 3,504 Pizza Hut outlets, and 988 outlets for other brands. In 1H24, 59% of KFC's new stores were opened in lower-tier cities (defined as third to sixth-tier cities), with 56% of the total stores located in these cities. 21% of KFC's new stores and 11% of total stores were franchise stores. For Pizza Hut, 57% the new stores and 45% of the total stores were located in lower-tier cities. 3% of Pizza Hu's new stores and 5% of total stores were franchise stores. The payback period has been maintained at 2 years for KFC, while Pizza Hut's payback period has been shortened from 3 years to 2-3 years.
Resilient same-store sales. During 2Q24, KFC's total system sales increased 5% YoY, while same-store-sales growth (sssg) decreased 3% YoY, with transaction up 4% and average ticket price down 7%. The average ticket price was Rmb37, versus Rmb35 in 2Q19. Pizza Hut's total system sales increased 1% YoY, while sssg decreased 8% YoY, with transaction up 2% and average ticket price down 9%. The average ticket price was Rmb88, which declined from Rmb115 in 2Q19. The decrease in average ticket price was in line with the strategy to target mass market.
New store models. The side-by-side KCOFFEE cafe store has lower operating cost by sharing the same kitchen with a KFC store. The number of this model increased from 100 in March to c.300 in July and is expected to reach 500-600 by end-2024. Pizza Hut WOW store model, featuring "Simpler Operations, Good Variety and Excellent Value-for-money", was introduced in May, and the number exceeded 100 by July and is expected to reach 200 by year end.
Maintain Buy. We like the company's innovation ability, diversified store types, as well as an industry-leading supply chain management and digital system. We lower target price from HK$450 to HK$408, and with 61% upside potential, we maintain Buy rating.
Risks: Lower-than-expected sssg; negative news and food safety incidents.
