20221108-招银国际-百胜中国-09987.HK-2022_Consumer_corporate_day_takeaways_9页_1mb

Yum China (9987 HK) Company Update Summary

Core Content

Yum China, a subsidiary of Yum! Brands, has shown strong performance in its third quarter of 2022, with notable improvements in sales and net profit. The company's strategy of focusing on the mass market, improving per store economics, and being included in the Stock Connect program has contributed to its positive outlook. The firm maintains a BUY rating with an updated target price of HK$465.05, reflecting a 30x P/E multiple for FY23E, which is higher than the 5-year average of 23x. The company's adjusted operating profit and net profit growth expectations are also positive.

Key Highlights

• Performance in 3Q22:

  • Sales increased by 5% YoY to RMB 2.7 billion.
  • Net profit surged by 100% YoY to RMB 208 million, surpassing Bloomberg's estimate by 72%.
  • The beat was attributed to:
    • Stronger-than-expected same-store sales growth (SSSG) due to successful new products and operating leverage.
    • Resilient gross profit margins, supported by innovative products and cost control.
    • Rental relief and lower-than-expected staff cost inflation.

• Operating Margins:

  • KFC: 20.6% in 3Q22 vs 13.6% in 3Q21.
  • Pizza Hut: 13.4% in 3Q22 vs 8.2% in 3Q21.
  • These represent the highest levels since 2018.

• Store Openings and Market Conditions:

  • The company maintains its FY22E store opening target of 1000-1200, including the addition of Taco Bell and Lavazza, despite the COFFii & JOY closures.
  • Store openings are expected to be faster in FY23E, especially with the contribution from Taco Bell and Lavazza.
  • While there are concerns about Covid-19 in 4Q22E, the impact is expected to be manageable, as it is not the peak season.
  • The number of stores affected by outbreaks rose from 400/400 in Jul/Aug 2022 to 900/1400 in Sep/Oct 2022, but the drag is not severe.

• Cost Management:

  • The company has improved its cost control, particularly in:
    • Payroll and benefits: Only 2% inflation in FY22E, due to delayed wage increases.
    • Rental and other operating expenses: Improved due to rental reliefs and variable rental terms for new stores.
    • Raw material costs: Inflation on items like beef, chicken, and coffee beans is manageable, with the company locking in prices for some products.

• New Products and Innovations:

  • Successful product launches such as whole chicken, beef burger, and durian pizza have enhanced the menu and improved margins.
  • A new chicken breast burger with lower costs and ASP of RMB 9 is highly value for money.
  • These innovations have made the menu less dependent on chicken and more adaptable to inflationary pressures.

• Revenue and Profit Growth:

  • The company revised its FY22E/23E/24E net profit estimates by -1%, +3%, and +9% respectively.
  • Revenue is expected to grow by 1.4% in FY22E, 16.5% in FY23E, and 12.8% in FY24E.

• Valuation and Financial Metrics:

  • Yum China is currently trading at 26x FY23E P/E, which is still justified given the 24% adjusted OP CAGR.
  • The company's market cap is HK$167,349 million, with a 3-month trailing turnover of HK$274.99 million.
  • The company's P/B ratio is 2.6x for FY22E and 2.4x for FY23E, with a ROE of 10.2% in FY23E.

Key Information

• Store Economics: Improved through automation, efficient labor use, and smaller store sizes.

• New Stores: 50% of KFC new stores are smaller, and 75% of Pizza Hut's new stores are either smaller or satellite stores.

• Capex Reduction: Lower capital expenditure (from RMB 2.5mn/1.7mn to RMB 2.0mn/1.6mn for KFC/Pizza Hut), leading to a healthier payback period of 2-3 years.

• Rental Relief: RMB 13mn in 3Q22, with variable terms for new contracts.

• Inflation Control: Management has taken steps to mitigate the impact of inflation on raw materials and staff costs.

• Shareholding Structure:

  • Primavera Capital: 5.7%
  • BlackRock: 7.6%
  • Invesco: 9.8%
  • Management: 0.2%
  • Free Float: 76.7%

• Share Performance:

  • 1-month: 0.3% absolute, 11.7% relative.
  • 3-month: 3.2% absolute, 29.0% relative.
  • 6-month: 27.5% absolute, 57.8% relative.
  • 12-month: -12.0% absolute, 35.5% relative.

Summary of Earnings Revisions

Valuation Table

Main Viewpoints

• Positive Outlook: Yum China is expected to continue its growth trajectory due to improved store economics and successful product launches.
• Covid-19 Impact: While there are concerns, the impact is expected to be manageable, especially as 4Q22 is not the peak season.
• Cost Control: The company has effectively managed inflationary pressures, especially on labor and raw materials.
• New Store Strategy: Focus on smaller and satellite stores, with a potential adjustment in the expansion plan for Lavazza if conditions worsen.
• Valuation: The current P/E ratio of 26x is justified by strong future growth expectations and efficient operations.

Conclusion

Yum China's 3Q22 results reflect strong performance, driven by effective cost management, innovative products, and improved store economics. The company maintains a BUY rating with a revised target price of HK$465.05, based on a 30x P/E multiple for FY23E. Despite the challenges posed by Covid-19, the company is well-positioned for continued growth, supported by its expansion plans and strategic adjustments.