Matters:

Yum China announced 2024H1 results, and the total revenue of FY2024Q2 increased 1% to 2.679 billion US dollars.

Without taking into account the impact of foreign currency conversions, total revenue should have been 85 million dollars higher, or 4% higher. Core operating profit increased 12%, net profit was 0.212 billion US dollars, +8% year-on-year, and adjusted net profit yoy +7%.

Net profit margin 7.9% (-0.5pct).

Comment:

24H1's system sales increased 5%, and 24Q2 system sales increased 4% (25% year-on-year increase), mainly due to the net additional store contribution of 8%. 24H1 added a total of 779 stores, 24Q2 added a total of 401 stores, and the total number of Group stores reached 15,423 at the end of the period (excluding KFC and Pizza Hut, the total number of other brand stores was 988). The opening of KFC stores accelerated month-on-month. There was a net increase of 328 KFC stores this quarter, of which 74 were franchisees, accounting for 23%, and the number of KFC stores reached 10,931 at the end of the period. Pizza Hut added a net of 79 stores this quarter, bringing the number of stores to 3504 at the end of the period. The 24-year store opening plan is still the company's total opening of 1500-1700 new stores.

Currently, about 56% of KFC stores are located in Tier 3-6 cities. Of the total number of stores, 11% are franchised stores, 45% of Pizza Hut stores are located in Tier 3-6 cities, and 5% of the total stores are franchised stores.

In 24Q2, KFC system sales increased 5%, thanks to the net addition of 8% of new stores, takeout sales increased 12% year over year, accounting for 38% of restaurant revenue, 67% of non-dine-in business, and 16.2% (-1.1 pct) of restaurant-level profit margin, mainly due to the increase in cost-effective products and rising wage costs. Q2 Takeout sales increased 11% year over year, and takeout accounts for about 38% of KFC and Pizza Hut restaurant revenue.

The sales of the Pizza Hut system increased by 1% in 24Q2, also mainly due to the net contribution of 8% of new stores, takeout sales increased by 6%, accounting for 38% of restaurant revenue, the non-dine-in business accounting for 48%, and the restaurant-level profit margin of 13.2% (+0.8pct), mainly due to improved operational efficiency.

24H1's same-store sales were -3% YoY; Q2 Company's overall same-store sales were -4% YoY; KFC same-store sales were -3% YoY (transaction volume +4%, customer unit price -7%). The customer unit price was 37 yuan, compared to 35 yuan in Q2 in '19. Pizza Hut's same-store sales were -8% compared to last year (transaction volume +2%, customer unit price -9%), and the unit price for 24Q2 was 88 yuan, compared to 115 yuan in Q2 in '19.

Q2 The company's operating profit margin was 9.9% (+0.2pct). Thanks to a steady restaurant profit margin (15.5%, which is basically the same as the same period last year) and management expenses, the share of raw materials in the current quarter was 29.75% (basically the same as the same period last year), employee costs accounted for 24.86% (-0.2pct), and the share of rent and other expenses remained stable, slightly decreasing by 0.27pct to 25.16%.

Continued repurchases show confidence. The 24Q1 company used about 0.681 billion dollars to repurchase 16.6 million shares and gave back about 0.249 billion US dollars to shareholders in the second quarter. Since the beginning of the year, the company has given back nearly 1 billion US dollars to shareholders, more than the total amount for 23 years. It is expected to return 1.5 billion US dollars to shareholders this year, and 3 billion US dollars in 24-26 years.

Profit forecast: We are optimistic that the core brand will sink and expand in the future. In the future, the company will continue to sink and build small town model stores for cities below the sixth tier. We are optimistic that the number of stores will reach 20,000 in '26. Considering the pressure on customer orders this year, we adjusted our 24-26 EPS forecast to $2.26, $2.43, and $2.69 (previous values were $2.30, $2.56, and $2.78). The PE corresponding to the current closing price is 15 times, 14 times, and 13 times, respectively. Store opening continued to accelerate in '24. I am optimistic about the company's further crypto expansion and performance resilience. Referring to the average valuation of the US restaurant industry, the company was given 20 times PE in 2024, with a corresponding target price of HK$351.88 (current exchange rate), maintaining the “recommended” rating.

Risk factors: Food safety risks, store expansion falls short of expectations, brand decline falls short of expectations, and mergers and acquisitions of its brands fall short of expectations.