The 1Q24 results of Yum China were satisfactory, however the catering industry remain subdued and hence we have become more cautious about YUMC's 2Q24E outlook. But since the turnaround in 2H24E should still be intact, plus the massive buyback and dividend payment, we continue to maintain BUY.

1Q24 results roughly inline. For 1Q24, Yum China's sales increased by 1% YoY to US$ 2.96bn, missing CMBI est. by 6%, due to: 1) slight miss in Pizza Hut's SSSG (fell by 5% vs CMBI est. of -3%), 2) CNY depreciation, 3) lower-than-expected sales per store (as a result of smaller-sized new stores). But net profit only fell by 1% YoY to US$ 287mn, inline with CMBI est., consisted of: 1) lower-than-expected GP margin (due to heavy promotions) but 2) better-than-expected rent and other opex and G&A expenses. In terms of segment, delivery sales grew strongly by 8% while dine-in sales fell by 2%. KFC's SSS was resilient and dropped by just 2% while Pizza Hut's SSS fell by 5%, and KFC/ Pizza Hut's restaurant level OP margin were at 19.3%/ 12.5%, 2.9ppt/ 1.7ppt lower than last year.

We are conservative about 2Q24E but still expect a turnaround in 2H24E. Even though Yum China's 1Q24 results were muted but we tend to believe this was mostly due to its highly fragmented industry nature (where price war could intensify easily when the economic growth slowed down). In fact, under these macro circumstances, the fast food segment has already outperformed and we are pleased by Yum China's successful execution of planned strategy of "driving transaction and sales while protecting the margin". Going forward in 2Q24E, we believe Yum China's strategy will continue: 1) a series of new product launches (e.g. Pizza Hut's Pizza Burger), 2) more value for money products (e.g. more Pizza Hut priced below RMB 50), 3) more small orders (e.g. one person meal or for delivery) and 4) K-coffee continues to be popular (30% YoY volume growth in 1Q24, boosted by new product like sparking coffee), more side by side K-coffee stands could be opened in the near future (kitchen will be shared with KFC stores and hence margin is protected). However we would still be conservative about 2Q24E, because of: 1) the high base effect (strong sales growth) and 2) margin drag, due to absence of other income and tax reliefs of US$ 12mn last year and heavy promotions (even though the management will step up its costs saving in the G&A expenses (could drive down to just 5% of sales), by its Project Fresh Eye and its AI technology). While the 3-year growth target during FY23-26E (HSD to double digit sales and double digit EPS) could still be intact, we have become slightly more conservative and now forecast only 4%/3% sales/ net profit growth in FY24E. But we are still expecting a pickup in 2H24E.

Maintain BUY but trim TP to HK$ 348.13. Our new TP is based on 23x FY24E P/E (revised down from 24x) still around 1 s.d. below 5-year average P/E of 27x. We revised down FY24E/ 25E/ 26E net profit by 5.4%/ 5.0%/ 4.4% to reflect: 1) slower-than-expected sales growth, 2) lower sales per store, 3) lower GP margin and 4) weaker operating leverage, etc. The counter is now trading at 19x FY24E P/E.