Yum China is one of the leading restaurant enterprises in China, with rich brand matrix and steady expansion. ① Yum China accounts for about 1.4% of the domestic catering market (0.6% and 0.5% for second / third places). Its brands are KFC and Pizza Hut, Little Sheep and Huang Jihuang, etc., which are the leading catering enterprises in China. In 2019, the same stores of the company's main brands KFC and Pizza Hut achieved positive growth of 4% and 1% respectively, while expanding 1006 new stores; in 2017-2019, the overall revenue was 467 pounds, the net profit was 41.87 billion yuan, and the business condition was sound and good, with the help of takeout during the epidemic. 2020Q1-3 reversed the trend and achieved a net profit of 2.683 billion yuan. According to the prospectus, the company plans to reach its goal of 20000 stores in the future, and according to the company's 2020Q2 quarterly report guidelines, the company is expected to maintain the rate of 800-850 new stores each year. ② went to IPO in Hong Kong in September 2020, and the fundraisers were: 1) Restaurant expansion: accounting for 45% of the fund raised, or about HK $8.673 billion. 2) Digitalization, food innovation and the integration of advantageous market resources: accounting for 45% of the funds raised, about HK $8.673 billion.

With the deepening of Chinese catering chain and the rapid development of market segmentation, the post-epidemic era of catering leader may accelerate the exhibition store.

The ① epidemic catalyzes people's requirements for the safety of catering brands, and better quality control and hygienic catering brands will become more choices for people. According to the prospectus, the CAGR of fast food and leisure catering in China is expected to be 8.3% and 7.9% respectively in 2020-2024, which is higher than the 6.8% growth rate of formal catering. ② spin-off point of view, the current penetration of domestic chain restaurants in China is low, especially in second-tier, third-tier and below cities. We believe that this epidemic is expected to accelerate the promotion of catering chains both in terms of supply and demand (only 19.6% of domestic proprietary and franchised restaurants account for only 19.6%, compared with 73.8% in the United States). The demand side is catalyzed by the epidemic situation for consumers' requirements for food and beverage hygiene, which in turn promotes the food and beverage brands with better quality control and hygiene to become a choice for more people, while the supply side is compared with small and medium-sized food and beverage stores. Leading brand catering enterprises have more funds to counter the trend to take low-cost properties, better single-store models and more talent preparation, or it is expected to accelerate the opening of stores in the post-epidemic era.

Brand well-known + digital management + first-class supply + food innovation, four advantages create the core barriers of Yum China: ① brand: the company's flagship brands are KFC and Pizza Hut, and new brands such as Little Sheep, Huang Jihuang and coffee are acquired by extension. Brand power has become a household name all over the country. ② digitalization and takeout: the company has about 265 million digital members, of which more than 60% are sold by members and 80% by digital order, helping to further improve the efficiency of store operation. In terms of takeout, the epidemic has given birth to a demand for branding superimposed by the "lazy man" economy, which is more in line with the characteristics of Western-style fast food such as low price, high frequency and delivery-brands such as KFC and Pizza Hut (40-50 yuan for takeout customers, corresponding to 48 yuan for Meituan 2020H1 takeout) are significantly hedged against the adverse effects of the reduction in takeout during the epidemic period. Looking forward to the follow-up, the epidemic has deepened the penetration and recognition of consumers' takeout, and the future takeout business is expected to continue to play a positive role in the same-store revenue growth of brands such as KFC. ③ supply chain: based on the existing supply chain automation module, the company builds the supply chain data center control tower to further improve the overall efficiency. ④ product innovation: the company attaches great importance to product innovation, creating popular styles + localized innovation to maintain the attractiveness of the brand.

KFC, Pizza Hut and the same store still have good potential, and a number of new brands continue to increase their strength. ① KFC: sinking showroom + takeout helps open room for growth. 1) Product + marketing: KFC focuses on fried chicken and hamburgers that are widely loved by consumers, and also launches popular style products such as tender beef Wufang and 13 fresh crayfish burgers. supplemented by the company's mature online promotion + offline promotion + takeout distribution, it continues to have a strong competitiveness in the catering industry.

2) Shop size: KFC's current exhibition store strategy has continued to develop the market from first-and second-tier cities, and has achieved a faster cash recovery period by strengthening the advantages of rent, passenger flow dividend and rapid climbing brought by brand power.

Combined with the estimated expansion rate of 460 new restaurants opened by KFC from 2017 to 2019, we estimate that the number of KFC restaurants in the Chinese market is expected to exceed 9000 in the next 3-4 years. 3) individual store growth: KFC has relatively excellent business ability, increased customer unit price and takeout business, and same-store sales have continued to increase over the past few years. Same-store sales in 2017-2019 are 5.0%, 2.0% and 4.0% compared with the same period last year. At the same time, the operating profit margin is higher. From 2017 to 2019, the operating profit margin of the restaurant is 15.8%, 15.7%, 15.7%, 15.7%. ② Pizza Hut: adjust the business strategy, single-store model is expected to improve. Pizza Hut actively adjusts restaurant positioning by means of cooperative marketing with various parties and strengthening offline promotions, gradually reducing customer unit prices, and optimizing Pizza Hut profit model in 2017-2019. Same-store sales of Pizza Hut restaurants from 2019 to 2019 are 1.0% and 5.0%, respectively. Operating profit margin is 7.5%, 4.6%, 5.6%. In the future, the single-store model is expected to further improve the exhibition space to promote brand profitability, which still needs to be followed up. ③ other brands: after the acquisition of Huang Jihuang in April 2020, the company established the Chinese Food Division, which continues to increase its efforts on Chinese food and beverage, and is expected to continue to enrich the company's catering industry with the Chinese coffee market of COFFii & JOY and Taco Bell Nuggets.

Investment advice: buy-An investment rating. We estimate that the homing net profit of the company from 2020 to 2022 will be 40.63max 56.79max 6.256 billion, corresponding to a growth rate of-15.6%, 39.8% and 10.2%, respectively, corresponding to 40.4x/28.9x/26.2x for 2020-2022, with a six-month target price of HK $525.

Risk tips: food safety risks, exhibition stores are not as expected, brand development is not as expected, raw material prices fluctuate, COVID-19 epidemic is higher than expected.