Yum China reported 3Q24 revenue of US$3.07bn (+5% YoY) and core operating profit of US$369m (+18% YoY), higher than our expectation, thanks to higher-than-expected same-store sales and operating efficiency improvement. We raise 2024E EPS forecast from US$2.14 to US$2.24, 2025E forecast from US$2.36 to US$2.4, and 2026E forecast from US$2.56 to US$2.61. We raise target price from HK$408 to HK$440, and with 22% upside potential, we maintain Buy rating.
Healthy store payback. In 3Q24, the company opened a net of 438 new stores. The total number of stores reached 15,861, including 11,283 KFC outlets, 3,606 Pizza Hut outlets, and 972 outlets for other brands. In 3Q24 YTD, 58% of KFC's new stores were opened in lower-tier cities (defined as third to sixth-tier cities), and 27% of KFC's new stores were franchise stores. For Pizza Hut, 60% of the new stores were located in lower-tier cities, and 7% of new stores were franchise stores. The payback period has been maintained at 2 years for KFC and 2-3 years for Pizza Hut. The company anticipates the franchise mix of net new stores will gradually increase to 40-50% for KFC and 20-30% for Pizza Hut over the next few years.
Resilient same-store sales. During 3Q24, KFC's total system sales increased 6% YoY, while same-store sales growth (sssg) decreased 2% YoY, with transaction up 1% and average ticket price down 3%. The average ticket price was Rmb38, versus Rmb36 in 3Q19. Pizza Hut's total system sales increased 2% YoY, while sssg decreased 6% YoY, with transaction up 4% and average ticket price down 9%. The average ticket price was Rmb82, which declined from Rmb110 in 3Q19.
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 c.300 in July to 500 in November and is expected to reach 600+ by end-2024. Pizza Hut WOW store model was introduced in May, and the number exceeded 150 by November and is expected to reach 200+ by end-2024.
Increased capital returns. The company targets to increase capital returns by 50% in 2024-2026 from US$3bn to US$4.5bn, including US$1.5bn in 2024.
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 raise target price from HK$408 to HK$440, and with 22% upside potential, we maintain Buy rating
Risks: Lower-than-expected sssg; negative news and food safety incidents.
