We believe Yum China SSSG might still be negative in 4Q24E (despite a positive foot traffic growth), but thanks to its soft raw material inflation and efficiency gains across store and headquarters levels, we do expect net profit growth to be decent in 4Q24E. Moreover, supported by the slightly more optimistic FY25E outlook, generous cash return programme and attractive valuation, we maintain BUY.

Sales trend may still be mildly under pressure in 4Q24E. We expect Yum China's SSSG in 4Q24E to be at around -3%, similar to that in 3Q24. Breaking down into brands, we now expect KFC/ Pizza Hut's SSSG to be at -2%/ -5% in 4Q24E, similar to the -2%/ -6% in 3Q24. In terms of ASP, we still think that would be declining, due to promotions and increasingly rational consumption by customers, but the foot traffic growth should still be positive in 4Q24E. Based on our estimates, SSSG could be flattish in Oct 2024, but slightly weakened in Nov and Dec 2024. However, we believe this performance is already leading in the overall catering industry.

But profitability is more important, which should still be under control in 4Q24E. Firstly, we believe the GP margin may be at around 70%, stable vs 3Q24 and better than 3Q23, supported by the declining chicken prices in China. Secondly, China's CPI continue to outpace the PPI in recent years, which shall help drive down the overall raw material inflation pressure. Thirdly, we also think the opex is in a very good shape, as management is still confident on improving its SG&A mix (as % of sales) to below 5% in FY24E and the A&P expenses are still under refinement (boosting the ROI with no material increase in overall budget). Therefore, we are forecasting a 4% sales growth and 17% net profit growth in 4Q24E.

We believe store expansion should still be fast in 4Q24E, due to seasonality. We forecast Yum China to open around 500 new stores in 4Q24E (vs 438 in 3Q24E), hence the overall new stores in FY24E could be at about 1,715 (close to high end of the FY24E guidance of 1,500-1,700), because of seasonality (more stores will be opened in 4Q) and the early CNY in 2025 (many stores are likely to be opened right before the big festival). Moreover, while the number of PizzaHut WOW stores has already met the target of 200 in FY24E, the number of K-Coffee has exceeded the target of 600 in FY24E (reached 700 already, based on our channel check); these are all rather positive in driving SSSG in FY25E, in our view.

Maintain BUY and fine-tune TP to HK$ 450.26. Our new TP is based on 22x FY25E P/E (unchanged). We fine-tune FY24E/ 25E/ 26E net profit forecasts by +1%/ +1%/ -2% to reflect a weaker SSSG but faster store openings. The stock is now trading at 17x FY25E P/E, still not demanding vs 5-year average of 25x.