Incident: Yum China 24Q3 achieved revenue of $3.07 billion, +5% (or +4%, at a fixed exchange rate); realized net profit of $0.297 billion, or +22% (or +21%, at a fixed exchange rate).

Q3 The decline in same-store sales narrowed month-on-month, gradually increasing the share of new store franchises. In terms of store operations, the 24Q3 system sales were +4% (KFC/Pizza Hut +2%, respectively); same-store sales were -3% (KFC/Pizza Hut -2%/-6%, respectively). Among them, KFC/Pizza Hut's same-store transaction volume was +1%/+4%, respectively. The decline in same-store sales narrowed month-on-month in 24Q3 (24Q2 same-store sales -4% year over year). Among them, KFC mainly saw a year-on-year decline in customer unit price and gradual rationalization of promotion efforts; Pizza Hut mainly saw a year-on-year increase in customer traffic, and the company's low-cost pizza, single meals, etc. attracted consumers who focused on cost performance and increased customer traffic.

In terms of opening stores, there was a net increase of 1,217 stores in the first three quarters of 24; of these, there was a net increase of 438 stores in 24Q3 (+352/+102, respectively), and the overall opening speed was faster than 24Q2 (a net increase of 401 in 24Q2); the total number of restaurants at the end of the period was 15,861 (11283/3606 for KFC/Pizza Hut, respectively).

Comparable restaurant profit margins improved year-on-year, and shareholder rewards increased 50% over three years. In 24Q3, food and packaging accounted for 31.7% of restaurant revenue, up 0.6 pct year on year, mainly due to cost increase due to promotion; salary and employee benefits accounted for 25.1% of restaurant revenue, -0.2 pct year on year, mainly due to improvements in the company's operating efficiency; rent and other costs accounted for 26.2% of restaurant revenue, -0.4 pct year on year, mainly due to improvements in marketing and advertising efficiency. Taken together, 24Q3 restaurant's profit margin was 17.0%, which was basically the same year on year (KFC/Pizza Hut was 18.3%/12.8%, respectively -0.3/+0.1 pct year over year); if 15 million dollar items affecting restaurant-level comparability were excluded, 24Q3 restaurant profit margin was +0.5 pct year over year. Furthermore, the company announced that the 2024-2026 shareholder return amount will be raised from 3 billion US dollars to 4.5 billion US dollars, increasing shareholder returns.

An important strategic transformation, with additional franchises, small store models, and Kenyue Coffee. Over the past 24 years, Yum China has undergone major transformations in store operations, including increasing the share of franchise stores, launching Pizza Hut WOW stores, KFC Mini stores, and Kenyue Coffee. The share of franchise stores will increase further in the next few years. The share of franchisees in KFC's net new stores will increase to 40%-50%, and Pizza Hut's share will increase to 20%-30%. The KFC Small Town Mini store and Pizza Hut WOW store have achieved rapid expansion with their lower investment threshold and better single-store model. The number of Kanyue Coffee stores that focus on high performance has grown rapidly from 100 in March to about 500 at present. It is expected to expand to 600 by the end of the year, which is expected to drive the sales volume of KFC stores by the number of units.

Profit forecast, valuation and rating: Considering the rapid improvement in operating efficiency, we raised the company's 2024-2026 net profit forecast to $0.895/0.957/1.051 billion, respectively (up 4%/3%/2%, respectively).

The current stock price corresponds to 2024-2026 PE 21x/19x/18x, respectively, maintaining a “buy” rating.

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