Source: Yaya Hong Kong Stock Circle Author: Kyle In the first half of this year, statistics show that at least 180 Hong Kong stock companies have implemented share buybacks, with a total amount of HKD 121 billion, setting a new high in the same period of history. Especially in the Internet companies, almost every shareholder return program has been significantly improved, which can be said to have opened a new era of Internet shareholder returns. Among these companies, Tencent, the "North Star" of Hong Kong stocks, is undoubtedly the most prominent. In the first half of this year, it contributed more than 40% of the repurchase volume of the Hong Kong stock market, firmly occupying the seat of the "repurchase king" of the Hong Kong stock market. In the second quarter, Tencent's single-quarter repurchase amount reached HKD 37.5 billion, which doubled from the first quarter's HKD 14.8 billion. The repurchase average price increased from HKD 290.6 to HKD 361.8, an increase of nearly 25%. It is worth mentioning that Tencent's repurchase amount this year will exceed HKD 100 billion, doubling from last year's HKD 49 billion. What is the concept of a one trillion repurchase plan? This amount is the sum of Tencent's total repurchase amount in the past ten years, which proves the management's confidence in future development and attaches importance to the demands of investors. Through various means such as repurchase cancellation, dividends, and physical distribution, Tencent has truly given back to shareholders in the capital market while achieving performance growth. One, the significance of a trillion repurchases is actively emerging. Looking back at the past two years, since Tencent's major shareholder Prosus began to reduce its holdings, the stock price has been somewhat suppressed. In particular, there have been regular trading behaviors in the market when Hong Kong stocks perform poorly. For example, Hong Kong-listed companies have a "silent period for repurchase" in the month before the financial report is released, during which repurchase is not allowed. This caused great upward pressure on the stock price whenever Tencent entered the repurchase silent period before last year. As can be seen from the following data, of the five silent periods before the end of 2023, only Tencent's stock price in October-November 2022 rose, and in other times it fell. However, since the end of last year, Tencent's stock price has risen during two consecutive silent periods. Especially after the launch of the trillion-dollar repurchase plan this year, the repurchase volume has far exceeded the number of shares sold by major shareholders. Therefore, whether it is on normal trading days that can be repurchased, or during silent periods, the impact brought by the sale of major shareholders can be ignored, and this point is being formed by market consensus. For example, during the repurchase silent period from January to March this year, which happened to be the worst half-year Hong Kong stock market, the Hang Seng Index fell to 14,800 points. Tencent's performance during this period was significantly better than before. Even though the short selling ratio once reached 20%, the stock price did not fall, and the final interval increase was 6%. After the release of the better-than-expected 2023 annual report and the restart of the repurchase at the end of March, Tencent's stock price performed even better in the second quarter, with an increase of nearly 25%. During the same period, the Hang Seng Index and the Shanghai and Shenzhen Composite Indexes fell significantly, with gains of only 8% and 4%, respectively, while Tencent significantly outperformed the Hong Kong stock market with a gain of 25%. Behind this phenomenon, there is no doubt that the trillion-dollar repurchase plan, which has doubled from last year's amount, has played an important role. More importantly, after the repurchased shares are cancelled, Tencent's share capital has been declining for three consecutive years. Since 2021, Tencent's total share capital has decreased from 9.608 billion shares to 9.355 billion shares. In the first quarter of this year, Tencent issued ordinary shares decreased by 1.1% compared to the previous quarter, and the repurchased shares have also been gradually cancelled since this year. This trend will continue to increase earnings per share and further enhance shareholder value. (Caption) Starting in 2022, Tencent has increased its repurchase efforts. With the repurchase cancellation, the company's total share capital has gradually decreased.

Source: Yaya Hong Kong Stock Circle Author: Kyle The weather is good today The weather is good today.

As the year-end approaches, looking back at the performance of the dining industry this year, it is still unsatisfactory. Both high-end restaurants and budget restaurants are facing intensifying price wars. In this market situation, it further tests the operational level and cost-control capabilities of each restaurant.

Looking at the statistics in the chart below, in the first half of the year, among the 9 Hong Kong-listed dining stocks, 6 of them have shown a significant decline in net margin compared to the previous two years. The only ones where the net margin has not decreased, but instead increased, are Yum China and the newly added Domino's China version in Berkshire Hathaway's 13F portfolio:$HAIDILAO (06862.HK)$、$Yum China (YUMC.US)$、and the new addition Domino's China version in Berkshire Hathaway's 13F portfolio:$DPC DASH (01405.HK)$;

These three are also among the few dining stocks that have risen in stock price this year, $HAIDILAO (06862.HK)$ up 16% this year,$YUM CHINA (09987.HK)$up 15% this year, $DPC DASH (01405.HK)$ Up 20% within the year;

Specifically, the market funds favor Yum China more. On the one hand, this is because Haidilao's growth prospects are limited after expanding its stores, and DPC Dash has poor liquidity. Yum China managed to capture market share through price cuts, achieving both increased revenue and profit. In the context of the bleak dining industry this year, this is quite an achievement.

Additionally, Yum China repurchased $1.5 billion within the year, with the repurchase amount for the next two years increased to $3 billion. This provided a safety cushion of about 8% in the unfavorable consumption environment. Therefore, in the recent market pullback, Yum China did not decline much.

The next two years will mark the second growth phase for Yum China, with plans to open nearly 5000 new stores, accelerating entry into lower-tier markets. The management is focusing on smaller-sized KFC stores with higher profit margins for quicker returns and directly competing with Sala's growth story through the Pizza Hut WOW concept.

First, Yum China, who understands local consumers better.

Let's first review why Yum China led the reversal from the bottom in this round of market trends.

In the past two years, due to strong expectations against weak realities, stock prices have been fluctuating significantly. Yum China dropped all the way from 23 to the beginning of this year. Along with the A-shares rebounding from the bottom. However, in March this year, with economic data confirming signs of deflation again, Yum China dropped straight from March to the bottom in August. The reason for the reversal was the second-quarter report.

Looking at the second-quarter report, firstly, it was due to the effectiveness of the management's strategy to expand store operations into lower-tier markets. Based on price reductions in the first half of the year, system sales increased by 5%, further growing on top of last year's 24% growth. During the same period, the second-quarter revenues of the dining industry / other restaurants were very bleak, with declining profits. The most direct comparison is Beijing's report of 2628 dining enterprises seeing an 88% profit decline in the first half of the year.

Second, although yum china's average customer spending in Q2 declined by 8%, its core operating profit margin has already exceeded the same period last year, with a 3% increase in net income during the same period. In August, the lowest stock price was around 90 billion HKD, while the net cash on the balance sheet was 3.1 billion USD at that time. With an additional 1.5 billion USD share repurchase quota this year, the market has begun to turn bullish on yum china, and the bottom for yum china seems relatively certain.

The key decision for yum china to achieve a turnaround is mainly through price cuts for promotions, which is actually counterintuitive. In an environment of poor dining consumption, when most restaurants are forced into price wars by lowering prices, their profit margins are generally eroded. However, yum china is able to lower prices while increasing overall revenue and profit margins. Of course, same-store sales are still slightly declining, mainly relying on expanding the number of stores to contribute to revenue growth. It is expected that opening 5,000 new stores in the future will contribute to a 10% revenue growth.

Looking at specific pricing promotions, such as extending the popular 'Crazy Thursdays' promotion to two days; launching breakfast promotions this year, offering a combo of 9.9 yuan for coffee and a burger, and a 50% discount on an 8-piece set during weekend breakfast promotions, for example, 8 paninis for only 28 yuan, averaging at 3.5 yuan per panini.

Moving on to pricing during meal times, for example, a combo of a burger, drink, and snack for only 19.9 yuan; a 69 yuan combo of three chicken buckets; a 12 yuan combo of two pairs of chicken wings for afternoon tea, and so on.

In comparison to competitors, yum china is instead lowering their prices.mcdonald's (MCD.US) In the past two years, yum china has been raising prices, with the lowest price for a new three-piece set during meal times being 24 yuan, while the regular combo set requires at least a gold card, starting at nearly 30 yuan. Compared to KFC, mcdonald's no longer has any price advantage.

These strategies from yum china have significantly increased store operating efficiency, as well as revenue and profit, allowing KFC to do business at all times and introduce more localized products. It seems that mcdonald's has not been as meticulous in this aspect.

It can only be said that Yum China understands the Chinese local consumers better and performs better in the Chinese market. In contrast, KFC lags behind McDonald's in both store numbers and revenue in foreign markets.

Second, though inconspicuous, the small store model that smells better.

It is worth noting that cheapness is not the most straightforward logic, but Yum China has successfully operated the profitable model of small stores, and the market is bullish on gradually replicating it in the next 5000 stores.

First, Yum China has discovered stores in the lower-tier markets. Although the stores are small, the profit margin and per customer spending are similar to those of large stores in first and second-tier cities, which is quite counterintuitive. Because in the past years, in a non-deflationary environment, it might be hard to believe that the profit margin of first and second-tier city stores may not be better than fourth and fifth-tier city stores.

Moreover, with first and second-tier city consumption shrinking while lower-tier city consumption is on the rise. We have previously discussed this trend in our articles.$JIUMAOJIU (09922.HK)$This kind of trend is more favorable for the development of large chain brands, and Yum China is one of the beneficiaries of this trend.

Specifically, Yum China enters the lower-tier market through direct operation and franchising. Firstly, by opening smaller KFC stores, the labor and rent costs are lower than those in first and second-tier cities, and secondly, by using more automation to reduce staff and enhance overall efficiency.

For example, KFC has launched a low-threshold investment small town mini store, with an investment of less than 0.5 million yuan, about one-third of the traditional store size. Not only is the investment cost low, but the menu is also simplified, with only 20-30 SKUs. It usually takes only 2 years to break even, and the profit margin is higher than that of large stores.

Furthermore, Yum China has newly launched the Pizza Hut WOW store model, which is also a smaller store with lower prices and fewer SKUs. Over 50% of the products are made using automated machinery. According to Goldman Sachs' report, the profit margin of Pizza Hut WOW stores is currently within 10%. This model directly benchmarks the Japanese company Saizeriya, which has a single-store profit margin of 15-20%. The new narrative suggests that in the future, Pizza Hut WOW stores will achieve the same net profit margin as Saizeriya. There will be 500 new WOW stores next year, with 300 already opened this year. Based on the store opening target, it is highly likely that the number of Pizza Hut WOW stores in China will exceed that of Saizeriya.

So, at this point, everyone should be curious why only Yum China is doing this and doing it better, presenting a new narrative of second-round growth to the market. Can't Western fast food brands like McDonald's and Burger King emulate this?

For example, comparing the third-quarter reports of Yum China and McDonald's, Yum China's Q3 revenue and operating profit both grew by 6%. Although same-store revenue decreased by 2% year-on-year, average order value decreased by 3% year-on-year, the decline has narrowed compared to the -7% decline in Q2. KFC's average order value is 38 yuan, with a 1% increase in orders. Management expects same-store order volume to continue growing in the fourth quarter.

In the future, among the net new stores, the proportion of KFC franchise stores will increase to 40-50%, while Pizza Hut will increase to 20-30%. Management is accelerating entry into lower-tier cities.

In contrast, although half of McDonald's 961 new stores are entering lower-tier markets, same-store sales in China in Q3 this year decreased by 3.5%, offsetting growth brought by other regions. Looking at revenue contribution, the new stores in third, fourth, and fifth-tier cities did not bring significant revenue increases, unlike what Yum China has achieved.

One reason for the pricing strategies of KFC and McDonald's is that KFC's pricing is superior to McDonald's. So why doesn't McDonald's lower its prices? The biggest possibility is that if both lower prices, it would have a greater impact on the single-store profit margin.

What's more important here is the supply chain. This year, McDonald's is also trying to reduce prices and costs, but McDonald's price reduction involves changing suppliers. In the eyes of consumers, this means lowering product quality for a lower price, which is unsatisfactory for consumers.

On the contrary, Yum China lowered prices, but the products remained the same, with no significant change in taste and became cheaper, which is the biggest difference. Looking at it from another perspective, if it's just a mindless price war that harms one's own profit in exchange for revenue, then in fact, if competitors follow suit, it's just a vicious cycle where nobody makes money. However, if one can lower prices and still earn more money while competitors cannot imitate, then that is the best scenario, and Yum China is in this situation.

Therefore, even McDonald's currently cannot introduce more low-priced products like KFC to cater to consumers, local brands like Huolaisi and Tasuteen also won't be able to engage in price wars. Finally, it might be seen that when Yum China enters the lower-tier market, the competitive pressure encountered is not as high as imagined, because it has a clear cost advantage. When the business is good and the franchisees quickly recoup their investments, other competitors face even greater pressure.

Because the opponents themselves are not making much profit, for example, brands like Huolaisi and Tasuteen have opened a KFC or McDonald's next door in fourth and fifth-tier cities that have lowered prices. With the same prices, more consumers would choose the big brands.

Conclusion

Overall, Yum China is in a relatively good development period at the moment. First, even in a challenging dining environment, it can find a suitable development path and provide an 8% direct shareholder return. Second, when the dining environment improves, this may be currently the most beneficial BETA for the dining sector.

Of course, recently there have been signs of McDonald's seemingly introducing more new low-priced products. In this competitive landscape of major brands, considering the investment payback period and store costs, the small brands are likely to be phased out in the end.

Editor/Rocky