Results for the first quarter of 2016 were lower than expected

In the first quarter of 2016, Yum Group's total sales revenue fell 13.4% year-on-year to 4.670 billion yuan; the company recorded a net loss of 18 million yuan, which fell short of our expectations.

The growth rate of same-store sales was still weak, at -9% (-8% in 2015), mainly due to abnormal weather, e-commerce development, and offline oversupply.

After excluding non-recurring items, the company's operating expenses fell by 5%, mainly due to the company's cost control measures. However, rising corporate financial expenses and tax expenses continue to drag down profit margin performance.

Development trends

In the first quarter of 2016, 27 of the 59 stores were at a loss. Aging stores and outdated business strategies have led to the rapid loss of the company's market share.

The company's first shopping mall project, Qingdao Golden Lion Plaza, opened in April, with a total area of about 230,000 square meters. However, compared to department stores, shopping malls usually have lower sales efficiency and returns, which may lead to more losses in the short term.

Valuation and advice

The company's net profit forecast for 2016 was lowered from 10 million yuan to -26 million yuan; the net profit forecast for 2017 was lowered from 12 million yuan to -8 million yuan. Maintaining the “Avoidance” rating, the target price was lowered by 4% to HK$0.7, based on 0.4 times the 2017 market sales rate.

risks

Potential consolidation risks.