On June 17, media reported that Yum China had secretly submitted a listing application to Hong Kong Exchanges and Clearing in recent weeks, raising as much as 2 billion US dollars. As soon as the news came out, Yum China's share price immediately reacted and finally closed up 7.21%, setting a new high since its listing.

In fact, this is not the first time Yum China has been rumored to be listed in Hong Kong for a second time. In January this year, there were also market rumors that Yum China was planning a secondary listing in Hong Kong. However, in the face of such rumors, Yum China did not comment on "yes or no".

In fact, Yum China was spun off and listed from Yum only a few years ago, and he also said in the company's conference call that he had enough cash on hand, but in this wave of return of Chinese stocks, it was reported that he was listed in Hong Kong for a second time. What is the point worth paying attention to? What is the basic situation of Yum China? The catering companies in the Hong Kong stock market are seriously polarized. with the fundamentals of Yum China, can they become a member of the head?

Yum China: the road of Sinicization is getting deeper and deeper.

1. Increasingly Chinese brands and product operation

As the largest catering company in China, Yum China currently owns the domestic operation and management rights of KFC, Pizza Hut, Oriental White, Little Sheep, Taco Bell, COFFii & JOY, Huang Jihuang and other brands.

As of March 31, 2020, Yum China's total number of restaurants has reached 9295, of which the total number of KFC restaurants in the mainland has reached 6661, Pizza Hut restaurants has reached 2271, Little Sheep, Oriental White, Taco Bell and COFFii & JOY have reached 363, making them well-deserved catering brothers.

In terms of revenue contribution, KFC is also Yum China's main source of revenue, with a long-term share of about 70 per cent, followed by Pizza Hut with a long-term share of about 25 per cent, while other restaurants overall account for a relatively small proportion. In terms of revenue growth in the past five years, the company as a whole has a compound annual growth rate of 6.16%, compared with 6.09% for KFC and 3.00% for Pizza Hut, which is mainly driven by KFC.

In terms of profit contribution, KFC is also a major contributor, and its operating profit margin has been steadily maintained at a high level in recent years, but Pizza Hut's operating profit margin has gradually declined in recent years.

But KFC, which accounts for about 70 per cent of its profits, had 6661 stores at the end of March, all over China's streets and even sinking to third-to sixth-tier cities in China. According to the latest financial report, 55% of KFC's stores are located in third-to sixth-tier cities, while 67% of new stores are located in these offline cities. Pizza Hut, which accounts for about 25%, has 41% of its stores in third-to sixth-tier cities. It can be said that from the store layout, Yum China's main brand has completely covered the offline cities, the depth of "Sinicization".

In addition to KFC and Pizza Hut, other brands under Yum China are mainly Chinese food, such as Oriental White is a chain of Chinese restaurants, Little Sheep is a traditional Chinese hot pot, and the newly acquired Huang Jihuang is also a chain of Chinese leisure restaurants.

In addition to the Sinicization of the brand, Yum China's brand products are also increasingly Chinese, three meals a day revolve around the Chinese people. From the perspective of KFC's products, the old Beijing chicken rolls that consumers are familiar with are very successful Chinese localization products. After that, KFC has gradually learned about traditional Chinese dishes such as seafood egg porridge, Youtiao, pancakes, covered rice and so on. Now it has a new traditional Douhua. From morning till night, it is not difficult to find traces of Sinicization in KFC's menu, including soybean milk Youtiao porridge for breakfast, old Beijing chicken rolls for snacks, various covered rice for lunch and dinner, and even midnight snacks in some cities, draft beer from Qingdao.

Today, the label of KFC's foreign fast food is becoming less and less obvious, and in recent years, the acquisition of Huang Jihuang is also seen by the market as a massive increase in Chinese food and beverage in the Chinese market. Of course, behind the whole operation of Yum China's Sinicization, we should pay more attention to its Chinese capital layout and management.

2. Sinicized capital layout and management.

According to Wande's list of shareholders with more than 5 per cent of Yum China's shares, there are all foreign investors, but there is a familiar investment company, Chunhua Capital (Primavera), which holds 6.22 per cent of Yum China.

In 2016, just as Yum China was preparing to go public, its parent company, Yum, reached an agreement with Chunhua Capital Group and Ant Financial Services Group to jointly invest US $460 million in Yum China, of which Chunhua Capital invested US $410 million. Ant Financial invested US $50 million, which will be carried out at the same time as the spin-off of Yum and Yum China.

In October 2015, Yum China's parent company, Yum, announced that it had decided to spin off its China business and prepare to go public independently. The then CEO Greg Creed of Yum said in an interview with the Wall Street Journal that this was done to liberate the interests of the majority of shareholders and that the development of Yum's parent company would be more stable. The introduction of strategic investment in China is also a further step in Sinicization, especially the investment of Ant Financial Services Group, which will help to build an online alliance of tens of millions of fans for Yum China's brand stores and make full use of Alipay tools to deepen the Sinicized operation.

The news of listing in Hong Kong is also a manifestation of the Sinicization of capital. In addition to the introduction of China's strategic investment, Yum China is also very Chinese in terms of personnel, and the management is all Chinese.

The current company's CEO is Joey Wat, who was born in China in 1971, went to Hong Kong from Fujian at the age of 9 and started working in a restaurant at the age of 15. He joined Yum in 2014 as president of KFC in China, and became president and chief operating officer of Yum China after 2017, then president and CEO.

It is the understanding of the Chinese market, and it is precisely because of the poor experience of childhood, that qu Cuirong understands China's lower-level employees better: "not everyone has the conditions not to work." We'll be there when they need it. ". In this epidemic, except for stores in Wuhan and other areas seriously affected by the epidemic, qu Cuirong asked other areas to keep opening stores. When the doors of stores on the street were tight, KFC stores were brightly lit.

It is precisely because of the insistence of the management that the share price of Yum China has not been affected by the epidemic, but continues to hit new highs behind.

So, how hard did this epidemic hit Yum China?

Second, the polarized catering stock market

1. Yum China under the epidemic

Judging from Yum China's financial report data in the first quarter of this year, the epidemic indeed had a certain impact on the company's performance. According to the financial report, Yum China's total revenue in the first quarter was $1.75 billion, down 24% from a year earlier; system sales were down 20% from a year earlier, including 15% for KFC and 38% for Pizza Hut; and same-store sales were down 15% from a year earlier. KFC fell 11% and Pizza Hut fell 31%.

Net profit also fell along with revenue, with net profit of $62 million in the first quarter, down 72% from $222 million in the same period last year, and adjusted net profit to $63 million from $230 million in the same period last year.

However, as the company persisted in operating in other regions and took the lead in implementing contactless distribution and contactless delivery services, Yum China's delivery sales increased by 40%, and the delivery business accounted for 35% of the company's sales, up 16% from the same period last year. Although the company's business was affected by the epidemic, management made it clear at the earnings meeting that Yum China's pace of expansion in China would not be affected, and the company would continue to invest in new store opening and store refurbishment to maintain its goal of opening 800,850 stores throughout the year.

On the whole, the impact of the epidemic on Yum China is limited, the scale of the company's expansion has not changed as a result of the epidemic, and in terms of stock price, Yum China has long been out of the impact of the epidemic, which is consistent with the performance of the head company of Hong Kong stock catering at the present stage.

2. Hong Kong stock catering industry under the epidemic.

With this epidemic, there has been an obvious differentiation of catering stocks in the Hong Kong stock market. The share prices of head catering companies represented by 99 Mao and Haidilao International Holding have long been out of the influence of the epidemic, and even repeatedly hit new highs.

However, there are also some catering companies, especially those whose main business areas are Hong Kong. As a result of the superimposed impact of the epidemic in the second half of last year, cash flow became more tight and share prices plummeted.

Of course, it is unscientific to distinguish the head company from the tail company only from the performance of the stock price. However, according to the Hang Seng industry classification standard, there are a total of 45 catering companies in the Hong Kong stock market, but the market capitalization is very small, the turnover is not high, and many Hong Kong catering companies' main business areas are not in the mainland. At the close of trading on June 24, there were only 10 catering companies with a market capitalization of more than 1 billion, while the stock price so far this year is only Haidilao International Holding and 99 cents.

In the long run, the reshuffle effect of the epidemic on the catering industry is very obvious. The logic of Hengqiang of those standardized chain leading catering brands in this incident has not changed, and the valuation is getting higher and higher. Of course, Haidilao International Holding and 99 Mao Jiu were not greatly affected by this epidemic, and it was also related to the abundant cash flow on hand, especially 99 Mao Mao, which was just listed this year and had a lot of cash on hand, if it had not been successfully listed a year ago. I can't imagine when it will be a good time to go on the market. Judging from the stock price trend of Yum China in this epidemic, it is undoubtedly the first echelon.

However, it is worth noting that Haidilao International Holding and 99 Maojiu, whose valuations are so high, are behind their rapid revenue growth. In the case of Haidilao International Holding, from 2015 to 2019, revenue grew from 5.774 billion to 26.619 billion, with a compound annual growth rate of 46.53%. At the same time, Haidilao International Holding is still in the stage of scale expansion, and the number of stores is growing. Similarly, the "Taier" brand under the flag of Jiumaojiu is also in the stage of rapid growth.

However, KFC, which is owned by Yum China, which accounts for about 70% of revenue, has basically been laid out in offline cities, and its future development is basically close to the ceiling, while Pizza Hut has also been in a stage of decline in recent years, and other brands have not been able to play a leading role for the time being. Can Yum China get a better valuation in the Hong Kong stock market?

Summary

In terms of scale, if successfully listed in Hong Kong, Yum China, with a current market capitalization of more than US $19 billion, can indeed become a Hong Kong stock head catering enterprise, but from the perspective of future growth, Yum China is obviously different from the current high growth head company. Haidilao International Holding and 99 Mao 99, as the current first echelon of catering stocks, have both large scale and fast growth at the same time. Yum China, whose market capitalization is similar to that of Haidilao International Holding, has entered a stage of large-scale but low growth.

However, the logic of Hengqiang, the strong in the catering industry, will not change, and the high-growth catering enterprises will gradually slow down one day after they develop to a certain scale in the future, and then the valuation level will fluctuate more with the performance.