Yum China released its 2024 three-quarter report. In 1-3Q24, the company achieved revenue of 8.708 billion US dollars, an increase of 3% year over year; adjusted net profit of 0.796 billion US dollars, an increase of 8% year over year. Among them, 3Q24 achieved revenue of 3.071 billion US dollars, an increase of 5% year over year, adjusted net profit of 0.297 billion US dollars, an increase of 20% year over year; diluted EPS was 0.77 US dollars, an increase of 33% year over year.

The same store improved month-on-month, and the number of orders drove growth. ① Overall sales of 3Q24, KFC, and Pizza Hut systems each increased by 4%/6%/2%, and same-store sales each decreased by 3%/2%/6%. It is estimated that the overall recovery was about 88% in '19, an increase of about 1 pct over 2Q. Separated, KFC/Pizza Hut's order volume is +1%/+4%, and the customer unit price is -3%/-9% each. ② In 3Q24, KFC and Pizza Hut each earned $2.31/0.62 billion, up 6%/2% year over year.

Joining empowers growth and opens up space for sinking. (1) Restaurant size. At the end of 3Q24, the total number of restaurants in the company was 15,861, with a net increase of 378, 401, and 438 in 1Q, 2Q, and 3Q respectively: KFC had a net increase of 1,183; 1Q, 2Q, and 3Q had a net increase of 307, 328, and 352 respectively; Pizza Hut had 3606 restaurants, with 1Q, 2Q, and 3Q net increases of 113, 79, and 102, respectively. In 3Q24, KFC and Pizza Hut's net new stores accounted for 58%/60%, respectively, and franchisees accounted for 27%/7%, respectively; the total number of stores in Tier 3-6 cities accounted for 56%/45%, respectively, and franchisees accounted for 12%/5%, respectively. The number of Kenyue Coffee and Pizza Hut WOW stores reached 500/150, respectively. (2) Restaurant performance. 3Q24 restaurant profit margin was 17.0%, unchanged year over year. Both KFC and Pizza Hut's restaurant revenue increased year over year, and profit margins varied. ① KFC: The company's restaurant revenue was 2.28 billion US dollars, up 6% year on year; restaurant profit margin was 18.3%, down 0.3 pct year on year; ② Pizza Hut: The company's restaurant revenue was 0.61 billion US dollars, up 2% year on year, and restaurant profit margin was 12.8%, up 0.1 pct year on year.

Digitalization and takeout continued to advance, and shareholder return plans increased by 50%. ① Members: At the end of 3Q24, the total number of KFC and Pizza Hut members exceeded 0.51 billion, of which membership sales accounted for 64%; ② Digitalization: 3Q24 KFC and Pizza Hut digital order revenue reached 2.61 billion US dollars, accounting for 90% of the company's restaurant revenue, ③ Takeout: 3Q24 takeout sales increased 18% year-on-year, and takeout accounted for about 40% of KFC and Pizza Hut restaurant revenue. ④ Shareholder return: 3Q repurchases/cash dividends of $0.19/0.06 billion each, maintaining the target of $1.5 billion for 24 years; the 24-26 shareholder return plan was increased by 50% to $4.5 billion.

Cost control continues to improve efficiency, and the share of employee costs, property rent, and other operating expenses and management expenses all declined.

3Q24, (1) raw materials and consumables: accounting for 31.7% of restaurant revenue, up 0.6 pct; (2) employee costs: 25.1% of restaurant revenue, a decrease of 0.2 pct; (3) property rent and other operating expenses: 26.2% of restaurant revenue, a decrease of 0.4 pct year on year; (4) management expenses: 4.5% of restaurant revenue, a decrease of 1.3 pct year on year.

Profit forecasting and valuation. In the medium to long term, the company has a steady pace of store expansion. The same store is expected to stabilize and provide high repurchase and dividend rates. We expect the company's net profit for 2024-2026 to be 0.901 billion US dollars, 0.963 billion US dollars, and 1.048 billion US dollars (previously 0.853 billion US dollars, 0.915 billion US dollars, 0.986 billion US dollars), respectively, up 8.9%, 6.9% year-on-year. Based on 22 times PE in 2025, the target price is HK$432.7 per share (calculated as 1HKD=0.1286USD) (originally HK$345.2, 20 times PE in 2024, +25%); maintaining the “superior to market” rating. Risk warning: risk of food safety issues, risk of termination of franchise agreements, risk of increased competition.