A leading Western-style fast food company, showing business resilience, the RGM2.0 strategy embarks on a new journey of expansion. The company is a leading Chinese restaurant company. It entered the Chinese market in 1987. Currently, it has three core brands: KFC, Pizza Hut, and Lavasa, covering tracks such as Western fast food, Western casual dining, and coffee. The scale advantage is obvious. As of 3Q2024, the company had 15,000 stores in China. After more than 30 years of market education, it has developed strong consumer stickiness. As of 3Q2024, the number of members reached 0.51 billion, accounting for 64% of member sales. The RGM2.0 strategy was proposed in September 2023, and the strategic focus will shift to store growth in the next three years. It is planned that the number of stores will reach 0.02 million by 2026. Among them, KFC will net increase the number of stores by 1200+ and Pizza Hut by 400-500.

The Western-style fast food circuit has significant advantages, and the market is unsaturated due to misplaced brands and competitive wrestling. Western-style fast food and Western-style casual dining can unify flavors through standardization of supply chains and operating procedures. They have underlying genes that are easy to chain, and burgers and pizzas are categories with a broad consumer audience and room for product iteration. In 2023, the size of China's Western-style fast food industry was 268 billion yuan, with a CAGR of 2.0% in 2019-2023. Growth is steady. Leading restaurant chains are still expected to increase their market share by seizing opportunities in sinking cities in the future.

Digitalization and supply chains are moats, and operational capabilities support the resilience of the same store. The company's capital expenditure will reach 3.5-5 billion US dollars in the next three years. Digital capabilities such as decision-making AI will increase user purchase frequency and customer unit price, flexible supply chain construction will drive continuous optimization of the cost structure, and expand to 45-50 logistics centers within 3-5 years.

The new store type realizes stock market encryption and a more efficient single-store model. The expansion of thousands of stores with KFC and Pizza Hut as the core and improved store efficiency will continue to contribute to the company's performance growth.

Investment advice: The company is a leading Western-style fast food company, leading KFC and Pizza Hut brands, and has outstanding advantages in scale and digitalization. We expect that in 2024-2026, the company will achieve net profit of 0.898, 0.974, and 1.059 billion US dollars, respectively, corresponding PE of 20.63, 19.03, and 17.51 times, respectively. Covered for the first time, a “gain” rating was given.

Risk warning: same-store growth falls short of expectations, market competition intensifies, store expansion falls short of expectations, food safety risks