20210916-招银国际-百胜中国-S-09987.HK-Another_hit_taken,_but_stay_mid-term_positive_6页_1mb

Yum China (9987 HK) Company Update Summary

Core Content and Key Insights

Yum China, a leading player in the Chinese catering sector, faced a significant profit warning in its 3Q21E results due to a large-scale outbreak of the virus in August 2021. This led to a $50–60% YoY decline in adjusted operating profit. The decline was attributed to three main factors: the impact of the Nanjing outbreak, rising raw material costs, and increased promotional activities. Despite this, the company remains optimistic about its mid-term growth prospects for 4Q21E and FY22E, driven by solid store expansions, strong delivery sales, and the ongoing structural benefits of the Pizza Hut reform.

The report maintains a BUY rating, with a revised target price of HK$532.66, down from the previous HK$597.92, based on a 30x FY22E P/E multiple, reflecting a sector-wide de-rating. Yum China's valuation at 26x FY22E P/E is considered reasonable compared to peers like HDL (35x) and JMJ (38x), despite the short-term challenges.

Main Points

• 3Q21E Performance:

  • Adjusted operating profit declined by $50–60% YoY.
  • Dine-in sales dropped by 20–30% YoY, and sales at transportation hubs and tourist locations fell by 40–50% YoY.
  • The outbreak started in late July and subsided in late August, with SSSG expected to improve in September.

• Forecast Adjustments:

  • SSSG is forecasted to decline by 4% in 3Q21E and increase by 3% in 4Q21E.
  • Sales are expected to grow by 2% and 9% in 3Q21E and 4Q21E, respectively.
  • Net profit is projected to drop by 70% in 3Q21E and increase by 41% in 4Q21E.

• FY22E Outlook:

  • Sales are forecasted to grow by 14%, adjusted operating profit by 26%, and net profit by 34%.
  • These projections are only slightly adjusted from previous estimates, with a 2%–5% cut in sales and net profit.
  • Strong delivery sales and store expansion are key drivers of growth.

• Valuation:

  • Yum China's valuation at 26x FY22E P/E is not demanding compared to peers.
  • The company's EBIT is expected to grow at a 15% CAGR from FY20 to FY23E.

Key Information

• Earnings Revision:

  • Revenue, gross profit, and net profit forecasts for FY21E, FY22E, and FY23E have been revised downward by 3.0%, 2.2%, and 2.2%, respectively.
  • EBIT margin is expected to decrease by 0.9ppt.

• Consensus vs. CMBIS Estimates:

  • CMBIS estimates are slightly lower than consensus for revenue and gross profit but higher for net profit.
  • The EPS forecast for FY21E is 1.726, lower than the consensus of 1.942.

• Segment Performance:

  • KFC delivery sales have shown strong growth, with 43% and 27% increases in Q221 and Q121, respectively.
  • Pizza Hut eat-in sales are expected to improve significantly due to the reform.
  • Overall sales are expected to grow by 19.5% in FY21E, 13.8% in FY22E, and 10.5% in FY23E.

• Financial Overview:

  • Net cash from operations is expected to increase in FY21E to FY23E, indicating strong cash flow management.
  • Net profit is forecasted to grow from $756 million in FY21E to $1,153 million in FY23E.

Conclusion

Despite the challenges faced in 3Q21E, Yum China is positioned for recovery and growth in the second half of 2021 and beyond. The company's strong delivery sales, store expansion, and Pizza Hut reform provide a solid foundation for mid-term growth. While the current valuation is modest, it is not considered demanding compared to its peers, supporting the BUY rating with a revised target price of HK$532.66.