Incidents:

Yum China announced its results for 2024Q3. In Q3, it achieved total revenue of 3.07 billion US dollars/+4%, adjusted operating profit of 0.37 billion dollars/excluding exchange rate impact +13%, adjusted net profit of 0.3 billion US dollars/excluding exchange rate impact +19%, and adjusted net interest rate of 9.7% /+1.2pct. The core financial indicators all surpassed market expectations.

The financial data was impressive, and the financial indicators all exceeded expectations. Revenue side: Q3 system sales growth rate +4%, KF/Pizza Hut +6%/+2% respectively; same store sales growth rate -3%, including KFC same store -2% (order volume +1% /customer unit price -3%) and Pizza Hut same store -6% (order volume +4% /customer unit price -9%). Cost side: Q3 foodstuffs account for 32% /+0.6pct; labor accounts for 25% /-0.2pct; rent & utilities & discount & advertising accounts for 26% /-0.5pct. Profit side: Q3 restaurant profit margin 17.0% /pct, including KFC/Pizza Hut 18.3%/12.8%, -0.3 pct/+0.1 pct, respectively; operating profit margin 12.1% /+1.0pct, of which KFC/Pizza Hut 15.7%/8.6%, +0.1 pct/+0.8 pct, respectively, and core operating profit 0.369 billion US dollar/ +18%.

The stores are expanding in an orderly manner, and the target is progressing steadily throughout the year. Q3 Company opened 438 net stores, including 352/102/-16 stores for KFC, Pizza Hut, and other brands, respectively, with 1,1283 KFC and 3606 Pizza Hut stores. In terms of business goals, the company plans to maintain 1,500-1,700 stores throughout the year, which is in line with the guidelines for 2023Q4. As of 2024Q3, the company had 15,861 stores, including 11283/3606/972 stores of KFC, Pizza Hut, and other brands, respectively.

With the new round of shareholder return plans, repurchases have increased dramatically. In the first three quarters of 2024, the company paid dividends of 0.187 billion US dollars, repurchases of 1.055 billion US dollars, totaling 1.242 billion US dollars (maintaining the annual target of 1.5 billion US dollars), and raised the total shareholder feedback for the three-year period from 2024 to 2026 from 3 billion US dollars to 4.5 billion/ +50%, with an average annual return of 1.5 billion US dollars, and a return of 8.5% based on the latest market value. At the same time, takeout sales were +18% year-on-year, accounting for about 40% of revenue, and maintained double-digit annual growth over the past ten years.

Investment advice: The company is a long-standing benchmark for localized Western-style fast food. It uses a small town model to enter the low-tier market. The 2024 opening guidelines are likely to be exceeded, and 20,000 stores can be expected. Under the Q4 low base effect, the same store is expected to improve. On the other hand, locking in raw materials, reducing restaurant area and personnel, and optimizing the cost of technical reform are expected to jointly drive marginal improvements in the single-store model. The company's net profit for 2024-2026 is expected to be 0.93/1.01/1.14 billion US dollars, corresponding to PE 21/19/17 times, respectively, maintaining a “buy” rating.

Risk warning: Food safety risks, competition exacerbates risks.