Incident: The company released its 2024 semi-annual report. 24H1 achieved revenue of 5.637 billion US dollars, +1% year over year (or +5% year over year, regardless of foreign currency conversion); achieved net profit to mother of 0.499 billion US dollars, +3% year over year; and achieved a core operating profit margin of 11.4%, -0.1 pcts year over year. Among them, 24Q2 achieved revenue of 2.679 billion US dollars, +1% year over year (or +4% year over year, regardless of foreign currency conversion); realized net profit to mother of 0.212 billion US dollars, +8% year over year; and achieved a core operating profit margin of 10.0%, +0.7 pcts year over year.

The decline in customer unit prices has dragged down the growth of the same store. In terms of store operations, 24Q2 system sales were +4% (KFC/Pizza Hut +1%, respectively); same-store sales were -4% (KFC/Pizza Hut -3%/-8%, respectively). The company actively adjusted customer unit prices to meet the consumer trend seeking cost performance, and customer unit prices declined a lot (KFC/Pizza Hut unit prices were -7%/-9%, respectively), but customer traffic increased year-on-year (KFC/Pizza Hut, respectively, +4%/+2%).

In terms of opening stores, there was a net increase of 401 stores in 24Q2 (+328/+79 for KFC/Pizza Hut, respectively); the total number of restaurants at the end of the period was 15,423 (10931/3504 for KFC/Pizza Hut, respectively). In terms of company guidelines, it still maintains the target of a net addition of 1500-1,700 stores in 2024 and a total number of 0.02 million stores in 2026.

Promotions increased and employee wages rose, and restaurant profit margins declined slightly year-on-year. 24H1 food and packaging accounted for 31.8% of restaurant revenue, +1.4pcts year on year; salary and employee benefits accounted for 25.8% of restaurant revenue, +0.3 pcts year on year; property rent and other operating expenses accounted for 25.8% of restaurant revenue, the same as year on year. Taken together, 24H1 restaurant's profit margin was 16.6%, -1.7 pcts year on year (KFC/Pizza Hut was 17.8%/12.8%, respectively -2.1/-0.5 pcts year on year).

In 24Q2, food and packaging accounted for 31.5% of restaurant revenue, +0.8 pcts year over year. The company partially relieved the pressure caused by the decline in customer unit prices through direct procurement of raw materials and optimization of the supply chain; salary and employee benefits accounted for 26.3% of restaurant revenue, -0.1 pcts year on year, mainly due to the company combining automation and artificial intelligence technology to continuously improve operating efficiency; rent and other costs accounted for 26.7% of restaurant revenue, -0.1 pcts year on year. Taken together, 24Q2 restaurant's profit margin was 15.5%, -0.6pcts year over year (KFC/Pizza Hut was 16.2%/13.2%, respectively -1.1/+0.8pcts year over year).

Pay attention to cost performance and continue to improve efficiency. The company began testing the Pizza Hut WOW store in May and launched a series of entry-level price products for young people and high price sensitive groups to meet the needs of the current consumption downgrade environment. WOW stores invest lightly. In the short term, they mainly remodel old stores. It is expected that the number of WOW stores will reach more than 200 by the end of the year. The number of K coffee stores, which also focus on high cost performance, grew rapidly from 100 in March to nearly 300 in July, and is expected to expand to 500-600 stores by the end of the year. 24H1K Coffee sold nearly 100 million cups of coffee and achieved relatively rapid growth. With a combination of lightweight investment and extreme cost performance, K Coffee is expected to expand rapidly in different tier cities, especially low tier cities. K Coffee is also currently the most important in the Yum Coffee segment.

In addition to focusing on cost performance, the company also continues to promote efficiency improvements. Recently, through the launch of Project Fresh Eye and Project Red Eye, we have reduced the provision of unnecessary items from the two dimensions of restaurant managers and customers to reduce costs. The results of the two plans were reflected in the second quarter, and are expected to further contribute to profit margins in the long run. In difficult times for the industry, Yum actively adjusts its business model and continues to promote cost savings. We are optimistic about the long-term potential of the company's cost-effective business.

Profit forecast, valuation and rating: Considering that prices in the catering industry are still under pressure, we lowered the company's 2024-2026 net profit forecast to $0.862/0.931/1.031 billion US dollars (3%/6%/7%, respectively), which is equivalent to EPS of $2.24/2.42/2.68, respectively. The current stock price is 14x/13x/12x for 2024-2026 PE, respectively. KFC and Pizza Hut still have some room for growth in terms of channel decline, and the small store model helps to sink better; the booming coffee business is expected to bring new growth impetus to the company and maintain a “buy” rating.

Risk warning: Industry competition increases risks, food safety risks, and exchange rate fluctuations.