20211029-招银国际-百胜中国-S-09987.HK-Headwinds_linger_despite_faster_expansion_6页_1mb

Yum China (9987 HK) Summary

Core Content and Key Insights

Yum China, a subsidiary of Yum! Brands, is experiencing mixed results and challenges in its performance. Despite revising its store expansion targets upward for FY21E, the company faces ongoing short-term headwinds that may impact its results in 4Q21E and 1Q22E. These headwinds include the ongoing effects of the pandemic, rising input costs, and a weak macroeconomic environment.

The 3Q21 results showed a 9% year-over-year (YoY) increase in sales to USD 2.55 billion, surpassing Bloomberg estimates by 5%, but net profit fell by 76% to USD 104 million, significantly below expectations due to lower gross profit margin and investment losses from Meituan.

Main Points

Outlook and Target Price

• Downgraded to HOLD from previous ratings.
• Target Price (TP) revised to HK$438.86, down from HK$532.66.
• Price Performance is currently at HK$451.00, with a -2.7% downside from TP.
• The downgrade is based on a 27x FY22E P/E ratio, reflecting sector de-rating and revised expectations.

3Q21 Performance

• Sales Growth: 9% YoY to USD 2.55 billion, beating estimates.
• Net Profit: Down 76% YoY to USD 104 million, below Bloomberg estimates by 18%.
• SSSG (Same-Store Sales Growth): -7% in 3Q21, suggesting a challenging environment.
• Operating Performance: Operating profit was inline with expectations, but gross profit margin was slightly below estimates.

4Q21E and FY22E Outlook

• SSSG is expected to decline further, with management estimates suggesting a -5% drop.
• Margin Pressures: Concerns over gross profit and operating profit margins due to input cost inflation (poultry, packaging materials, labor, delivery costs) and reduced rental relief.
• Store Expansion: A bright spot, with KFC and Pizza Hut showing 14% and 10% YoY growth, respectively, in store numbers.
• New Markets: KFC has entered 150 new cities in the past year, with 1,200+ potential cities left to expand into.

Earnings Revision

• Revenue: Revised up by 0.8% for FY21E, 2.8% for FY22E, and 6.8% for FY23E.
• Gross Profit: Revised up by 0.4% for FY21E, 1.9% for FY22E, and 6.6% for FY23E.
• Net Profit: Revised down by -7.8% for FY21E, -8.5% for FY22E, and +2.3% for FY23E.
• EPS (Diluted): Revised down by -7.8% for FY21E, -8.5% for FY22E, and +2.3% for FY23E.

Valuation and Peer Comparison

• Yum China's P/E ratio for FY22E is 27.7, slightly below the industry average of 27.2.
• The P/B ratio for FY22E is 3.3, also below the industry median of 3.9.
• ROE is expected to be 12.4% for FY22E, which is slightly lower than the industry median of 14.3%.
• The 3-year PEG ratio is 1.0, indicating potential for growth.
• Yield is at 0.9%, which is not particularly attractive compared to peers.

Key Financial Highlights

Revenue

• FY19A: USD 8,776 million
• FY20A: USD 8,263 million
• FY21E: USD 9,952 million
• FY22E: USD 11,545 million
• FY23E: USD 13,258 million
• YoY growth is projected to be 20.4%, 16.0%, and 14.8%, respectively.

Net Profit

• FY19A: USD 713 million
• FY20A: USD 784 million
• FY21E: USD 697 million
• FY22E: USD 924 million
• FY23E: USD 1,180 million
• Net profit is expected to decline by -8% in FY21E and -9% in FY22E, but to increase by +2% in FY23E.

EBIT

• FY19A: USD 901 million
• FY20A: USD 961 million
• FY21E: USD 956 million
• FY22E: USD 1,208 million
• FY23E: USD 1,544 million
• EBIT is projected to increase in FY22E and FY23E.

Operating Expenses

• FY19A: USD 5,456 million
• FY20A: USD 5,245 million
• FY21E: USD 6,176 million
• FY22E: USD 7,083 million
• FY23E: USD 8,005 million
• Operating expenses are expected to rise in FY21E and FY22E.

Net Cash Flow

• FY19A: USD 1,185 million
• FY20A: USD 1,279 million
• FY21E: USD 1,302 million
• FY22E: USD 1,567 million
• FY23E: USD 1,896 million
• Net cash from operations is expected to increase over the next few years.

Shareholding and Performance

• Primavera Capital: 5.7%
• BlackRock: 7.1%
• Invesco: 9.0%
• Management: 0.2%
• Free Float: 78.0%

Share Performance

• 1-month: -1.1%
• 3-months: -6.0%
• 6-months: -7.2%
• 12-months: +8.6%

Conclusion

Yum China is facing significant short-term challenges due to the ongoing impact of the pandemic, inflation, and a weakening macroeconomic environment. However, the company is focusing on rapid store expansion and new market penetration, which could be a key driver for future growth. Despite the downgrade and revised target price, the company's long-term growth potential remains, especially with its focus on off-premises sales and new product launches. The financial performance shows a mix of growth and contraction, with the potential for improved profitability in the coming years.