20230209-招银国际-百胜中国-09987.HK-Robust_recovery_and_store_expansion_ahead_10页_1mb

Yum China (9987 HK) Summary

Core Content

Yum China (9987 HK), a leading fast-food operator in China, reported a soft 4Q22 performance, with sales declining by 9% YoY to US$2.1bn and net profit dropping by 89% YoY to US$51mn. Despite the challenges, the company is expected to recover and expand in FY23E, supported by several factors including improved store economics, a revised opening plan, and inclusion in the Stock Connect program. The report maintains a BUY rating and raises the target price to HK$554.61, based on a 33x FY23E P/E multiple.

Key Performance Highlights

• Sales:
  • 4Q22: US$2.1bn (down 9% YoY)
  • FY23E: Expected to grow by 15.7% to US$11.072bn
• Net Profit:
  • 4Q22: US$51mn (down 89% YoY)
  • FY23E: Expected to rise to US$880.8mn
• EPS (Reported):
  • 4Q22: US$2.17
  • FY23E: Expected to increase by 108.6% to US$2.17
• P/E Ratio:
  • Current: 28.2x (FY23E)
  • Target Price: HK$554.61 (up from HK$465.05)
  • Up/Downside: 15.5%

Brand Performance

• KFC:
  • SSS: Only a 3% drop in 4Q22
  • OP Margin: 12.7% (up from 8.6% last year)
  • Strong performance in CNY with SSSG up by MSD
• Pizza Hut:
  • SSS: 8% decline in 4Q22
  • OP Margin: 1.9% (down from 5.9% last year)
  • Expected recovery in offline sales and improved store productivity

Store Expansion

• Net New Stores:
  • 4Q22: +538 stores (inline with guidance of 1,000–1,200)
  • FY23E: Targeting 1,100–1,300 net new stores
• Growth Implication:
  • Implies 8–10% YoY growth, which is considered conservative
  • The report argues that the company is likely to outperform due to:
    • No remaining drag from the pandemic
    • Improved store economics (lower breakeven point, better automation)
    • Better sales mix and higher productivity from new stores
    • Accelerated expansion plans from peers (e.g., MCD, SBUX)

Earnings Revision

• Revenue:
  • FY23E: US$11,072mn (revised down by -4.9% from previous estimate)
  • FY24E: US$12,414mn (revised down by -5.5%)
  • FY25E: US$13,938mn (no revision)
• Gross Profit:
  • FY23E: US$7,814mn (revised down by -4.9%)
  • FY24E: US$8,769mn (revised down by -5.5%)
  • FY25E: US$9,856mn (no revision)
• Operating Profit:
  • FY23E: US$1,117mn (up by 1.0%)
  • FY24E: US$1,370mn (down by -6.0%)
  • FY25E: US$1,718mn (no revision)
• Net Profit:
  • FY23E: US$881mn (up by 0.9%)
  • FY24E: US$1,087mn (down by -5.0%)
  • FY25E: US$1,363mn (no revision)
• EPS:
  • FY23E: US$2.169 (up by 8.4%)
  • FY24E: US$2.677 (up by 2.1%)
  • FY25E: US$3.357 (no revision)

Valuation and Market Position

• Valuation:
  • Current P/E: 28.2x (FY23E)
  • Target Price: HK$554.61 (based on 33x FY23E P/E)
  • 12-month price performance: 28.2% (absolute) and 20.7% (relative)
• Peer Comparison:
  • The report compares Yum China with other peers in the catering and consumer discretionary sectors.
  • Yum China is seen as a strong performer with a higher P/E and better growth expectations.
  • The company is considered a top pick due to its recovery potential and store expansion plans.

Assumptions and Outlook

• Key Assumptions:
  • Continued improvement in store economics and operational efficiency
  • Recovery in SSS and sales mix
  • Better performance in key markets (tourist attractions, transportation hubs)
  • Strong product pipeline and sales growth focus
• Outlook:
  • The company is expected to return to MSD growth in FY23E
  • Restaurant OP margin is projected to reach 16.3%, higher than FY19
  • The report believes the current valuation is not demanding, with Yum China trading at 28x FY23E P/E

Conclusion

Yum China is expected to show robust recovery and store expansion in FY23E, driven by improved store economics, better sales performance, and a strong product pipeline. The report maintains a BUY rating and raises the target price to HK$554.61, reflecting confidence in the company's ability to outperform the market. The company is seen as a key player in the fast-food sector with a favorable valuation and growth outlook.