Yum China released its 2024 semi-annual report. The company's 1H24 achieved revenue of 5.64 billion US dollars, up 1% year on year; adjusted net profit of 0.499 billion US dollars, up 2% year on year. Among them, 2Q24 achieved revenue of 2.68 billion US dollars, up 1% year on year, adjusted net profit of 0.212 billion US dollars, up 7% year on year; diluted EPS was 0.55 US dollars, up 17% year on year.

Brief review and investment advice

1. 2Q24 revenue and operating profit reached record highs. Despite a decline in same-store sales, overall sales continued to grow. ① Overall sales of 2Q24, KFC, and Pizza Hut systems increased by 4%/5%/1%, and same-store sales each decreased by 4%/3%/8%. It is estimated that overall sales have recovered to about 87% in '19, a slight decrease from 1Q24. Separated, KFC/Pizza Hut's order volume is +4%/+2%, and the customer unit price is -7%/-9% each. ② The total revenue of KFC and Pizza Hut in 2Q24 was 2.01/0.54 billion US dollars each. KFC increased 2% year over year, and Pizza Hut decreased 2% year over year. ③ The operating profit of KFC and Pizza Hut in 2Q24 was 0.26/0.04 billion US dollars each, and the restaurant's profit margin was 16.2%/13.2%.

Business analysis. (1) Restaurant size. At the end of 1H24, the total number of restaurants in the company was 15,423, with a net increase of 378 and 401 in 1Q and 2Q respectively: KFC 10,931, with net increases of 307 and 328 in 1Q and 2Q respectively; Pizza Hut 3504, with a net increase of 113 and 79 in 1Q and 2Q respectively. (2) Restaurant performance. The profit margin of restaurants fell 0.6 pct to 15.5% in 2Q24. The profit margins of KFC and Pizza Hut varied. Although overall restaurant profit margins declined slightly, the positive effects of cost restructuring gradually became apparent. ① KFC: The company's restaurant revenue was 1.98 billion US dollars, up 1% year on year; restaurant profit margin was 16.2%, down 1.1 pct year on year; ② Pizza Hut: The company's restaurant revenue was 0.53 billion US dollars, down 3% year on year, and restaurant profit margin was 13.2%, up 0.8 pct year on year.

Digitalization and takeout continue to advance. ① Members: At the end of 1H24, the total number of KFC and Pizza Hut members was 0.495 billion+, of which membership sales accounted for 65%; ② Digitalization: 2Q24 KFC and Pizza Hut digital order revenue reached 2.2 billion US dollars, accounting for 90% of the company's restaurant revenue, ③ Takeout: 1H24 KFC and Pizza Hut takeout sales increased 11% year over year, accounting for about 38% of restaurant revenue.

2. The share of raw materials increased, the share of employee costs, property rent and other operating expenses all declined, and the net interest rate increased by 0.5 pct to 7.9%. 2Q24, (1) raw materials and consumables: increased 3% to 0.8 billion US dollars, accounting for 31.5% of restaurant revenue, up 0.8 pct; (2) employee costs: 0.67 billion US dollars, accounting for 26.3% of restaurant revenue, a year-on-year decrease of 0.1 pct; (3) property rent and other operating expenses: 0.67 billion US dollars, accounting for 26.7% of restaurant revenue, a year-on-year decrease of 0.2 pct; (4) management expenses: decreased 13% to 0.13 billion US dollars It accounted for 5.3% of restaurant revenue, a year-on-year decrease of 0.8 pct.

Update your judgment on the company. We believe that the company focuses on providing cost-effective and innovative products. KFC and Pizza Hut stores are expected to expand steadily (with a net increase of about 1500-1,700 new stores in 2024), actively improve operating efficiency, stabilize restaurant profit margins (expected capital expenditure of about 0.7-0.85 billion US dollars in 2024), and create lasting value for shareholders (expected to give back a record $1.5 billion to shareholders in the form of quarterly cash dividends and stock repurchases in 2024), which can be achieved with the leading ability and scale in the industry Continued growth.

Update profit forecasts and valuations. We expect the company's total revenue for 2024-2026 to be 11.386 billion US dollars, 12.181 billion US dollars, and 13.032 billion US dollars, respectively, up 3.7%, 7.0% year on year; net profit to mother will be 0.853 billion US dollars, 0.915 billion US dollars, and 0.986 billion US dollars, respectively, up 3.1%, 7.2%, and 7.8% year on year; corresponding to EPS of 2.21 US dollars and 2.37 billion US dollars, respectively, $2.56. Based on 16-20 times PE in 2024, calculate a reasonable value range of 35.4-44.3 USD/share, corresponding to HKD276.2-345.2 per share (calculated as 1HKD=0.1283 USD); maintaining the “superior to market” rating.

Risk warning. Risk of food safety issues, risk of termination of franchise agreements, risk of increased competition.