1Q24 recorded net profit of US$287 million, surpassing Bloomberg's unanimous expectation that Yum China's 1Q24 would achieve revenue of US$2.96 billion /yoy +1%, not counting the impact of foreign currency conversion, yoy +1%; core operating profit of 396 million/yoy +1% (second place in the past 30 quarters), and net profit of 287 million/yoy -2%, better than Bloomberg's agreed expectations (266 million). Restaurant profit margin was 17.6% /-2.7 pct. The year-on-year decline was mainly due to industry competition. The active reduction in product pricing affected the proportion of food costs, but the effect of increasing digital capabilities in optimizing management cost rates was obvious. Based on the long-term, Yum China continues to accumulate scale effects with its advantages in brand/scale/digitalization/supply chain. At the same time, the company accelerates cost-effective product research and development, store innovation, and penetration into low-tier cities. Growth resilience is expected to be further strengthened to achieve a healthy balance of scale and efficiency. We expect EPS to be 2.25/2.49/2.75 US dollars for 24/25/26. Referring to the 24-year comparable company Wind and Bloomberg's average expectation of 25x PE, considering the relatively lackluster sentiment in the Hong Kong stock market, the company faced greater competitive pressure and discounted the price. Based on 22x24 PE, we obtained a target price of HK$388.13. Maintain a “buy” rating.
Same-store operations remained steady, and restaurant profit margins were affected by the decline in customer unit prices. The headquarters achieved significant 1Q24 system sales +6% yoy (KFC +7% /Pizza Hut +4%), mainly driven by store size growth (+8%), and same-store sales -3% yoy (KFC -2% /Pizza Hut -5%), operating steadily under high year-on-year base pressure. Takeout sales were +12% yoy, and KFC's takeout revenue accounted for +3pct to 39% year over year. KFC reduced delivery costs and launched one-person food products, driving an increase in order volume. On the profit side, 1Q24's restaurant profit margin was 17.6% /-2.7 pct, KFC 19.3% /-2.9 pct, Pizza Hut 12.5% /-1.7 pct, mainly due to low-price products and promotions affecting the share of food costs. KFC gross margin was 1.9 pct year over year, and Pizza Hut's gross margin was -2.5 pct year over year. Thanks to the reduction in headquarters costs and the level of digitalization, the management cost ratio improved significantly, -0.9 pct to 4.7% year over year. Subsequently, with the optimization of small stores, the scale effect was amplified, and profit margins may rise steadily and slightly.
Stores have maintained rapid expansion, and innovative store types and models have accelerated the company's 1Q24 net new store penetration. Among them, KFC had a net opening of 307 (58 were members) and Pizza Hut had a net opening of 113, a record high in the first quarter. The number of stores reached 15,022 at the end of the period (KFC 10,603 home/Pizza Hut 3,425). In 1Q24, the net increase of 68/ 60% of KFC/Pizza Hut stores was located in Tier 3-6 cities. The franchise model helped the company continue to penetrate remote and hub areas. K Coffee has opened more than 100+ side-by-side stores and is expected to form an effective collaboration with KFC. KFC's average initial investment per store fell to 1.5 million, and Pizza Hut dropped to 1.2 million. 1Q24 continued to increase dividends and expand its share repurchase program, achieving a total shareholder return of US$745 million (681 million repurchases/64 million dividends).
Target price HK$388.13; maintain “buy”
We expect 24-26 EPS of $2.25/2.49/$2.75 (considering the impact of buybacks on share capital).
Referring to the 24-year comparable company Wind and Bloomberg, they all agreed to expect a 25x PE average. Considering the relatively lackluster sentiment in the Hong Kong stock market, the company faced significant competitive pressure and discounted the price. Based on 22x24 PE, the target price was maintained at HK$388.13. Maintain a “buy” rating.
Risk warning: Expanding stores dilutes same-store revenue; the pace of expanding stores is slowing down; new brands are underperforming as expected.