20220801-招银国际-百胜中国-S-09987.HK-A_strong_beat_as_inflation_remains_controllable_7页_1mb

Yum China (9987 HK) Company Update Summary

Core Content and Key Insights

Yum China (9987 HK) delivered a strong performance in 2Q22, exceeding expectations due to excellent cost control, one-off savings, and benefits. The company is expected to see a turnaround in 2H22E, driven by a low base effect, relaxation of COVID-19 restrictions, and improved per store economics. The target price is raised to HK$450.06, maintaining a BUY rating.

Main Factors Behind the Strong Performance in 2Q22

• Sales: Declined by 13% YoY to US$2.1bn, in line with estimates.
• Net Profit: Fell by 54% YoY to US$83mn, significantly better than the consensus estimate of US$14mn/37mn net loss.
• Reasons for the Strong Beat:
  • Better-than-expected gross profit margin due to limited promotions, improved product mix, and simplified menu items.
  • Rental and government relief of ~US$20mn.
  • Reduction in marketing and maintenance fees.
  • Strong sales from community purchases and packaged food.

Forecast for 2H22E

• SSSG (Same-Store Sales Growth): Expected to be 3% in 3Q22E and 13% in 4Q22E, revised upward from -4% and 17%.
• Stores Affected by Pandemic: Continued to decline, reaching ~200 in July 2022 (vs ~800 in June and ~2,500 in May).
• Promotion and Marketing Efforts: Increased to boost sales during the peak season.
• New Retail Products: Continued growth, with ~RMB 450mn in 1H22 and a target of ~RMB 1bn for FY22E.

Cost and Profitability Outlook

• Costs Pressure: Expected to persist in 3Q22E, particularly due to commodity price inflation.
• GP Margins: Projected to remain stable at 71.0% in 3Q22E and 70.3% in 4Q22E, driven by YUMC's menu innovation and supply chain management.
• Adj. OP Margin: Expected to improve YoY due to better operating leverage, despite wage inflation and potential increases in marketing expenses.

Earnings Revisions

• Net Profit Estimates:
  • FY22E: Revised up to US$500mn (from US$354mn), a 41.2% increase.
  • FY23E: Revised up to US$845mn (from US$812mn), a 4.1% increase.
  • FY24E: Revised up to US$1,052mn (from US$1,015mn), a 3.6% increase.
• EPS Estimates:
  • FY22E: Revised up to US$1.146 (from US$0.805), a 42.4% increase.
  • FY23E: Revised up to US$1.937 (from US$1.834), a 5.6% increase.
  • FY24E: Revised up to US$2.410 (from US$2.280), a 5.7% increase.

Valuation and P/E

• Current P/E (FY23E): 24x, which is not considered high given the 3-year adjusted OP CAGR of 21%.
• Target Price: Based on a 30x FY23E P/E, which is higher than the 5-year average of 23x.

Store Expansion and Capex

• Store Expansion: Targets remain unchanged at 1,000-1,200 new stores and US$800mn to US$1bn in capex for FY22E.
• Store Profitability: The breakeven point for stores has effectively lowered by 20% to 80% of the pre-COVID level.

Financial Highlights

Earnings Summary (YE 31 Dec)

Earnings Revision (US$ mn)

Key Assumptions

• KFC Dine-in Sales: Expected to grow at 43.7% in FY22E, down to -2.4% in FY23E, and then to 9.6% in FY24E.
• KFC Delivery Sales: Expected to grow at 30.0% in FY22E, down to 28.0% in FY23E, and then to 25.0% in FY24E.
• Pizza Hut Dine-in Sales: Expected to grow at 21.7% in FY22E, down to -10.7% in FY23E, and then to 17.0% in FY24E.
• Pizza Hut Delivery Sales: Expected to grow at 25.0% in FY22E, down to 15.0% in FY23E, and then to 10.0% in FY24E.
• Others: Expected to grow at 2.8% in FY22E, down to -35.9% in FY23E, and then to 6.5% in FY24E.

Valuation Table

| Company | Ticker | Rating | 12m TP (HK$) | Price (HK$) | Up/Downside | Mkt. Cap (HK$ mn) | Year End | P/E (x) | P/B (x) | ROE (%) | 3yrs PEG (x) | Yield (%) |
|----------------|------------|--------|--------------|-------------|------------|------------------|----------|--------|--------|--------|------------|------------|-----------|
| Yum China | 9987 HK | BUY | 450.06 | 366.80 | 23% | 154,056 | Dec-21 | 41.3 | 24.4 | 2.4 | 2.2 | 2.0 |
| Jiumaojiu | 9922 HK | BUY | 21.30 | 17.08 | 25% | 24,832 | Dec-21 | 48.8 | 26.7 | 5.9 | 4.9 | 0.4 |
| Haidilao | 6862 HK | BUY | 15.59 | 15.66 | 0% | 87,289 | Dec-21 | 70.1 | 28.3 | 8.2 | 6.5 | 0.3 |
| Yihai | 1579 HK | BUY | 108.52 | 201.20 | 37% | 31,557 | Dec-21 | 37.8 | 27.3 | 3.6 | 3.2 | 1.1 |
| China Mengniu* | 2319 HK | BUY | 57.00 | 36.40 | 57% | 143,951 | Dec-21 | 21.1 | 17.6 | 2.9 | 2.6 | 1.3 |
| Nongfu Spring | 9633 HK | BUY | 53.00 | 47.00 | 13% | 528,584 | Dec-21 | 60.2 | 49.5 | 18.7 | 15.6 | 1.1 |
| Budweiser* | 1876 HK | BUY | 28.00 | 21.75 | 29% | 288,044 | Dec-21 | 33.8 | 28.9 | 3.1 | 2.9 | 1.1 |
| Tsingtao* | 168 HK | BUY | 86.00 | 76.65 | 12% | 131,536 | Dec-21 | 28.5 | 24.3 | 3.6 | 3.4 | 1.6 |
| CR Beer* | 291 HK | BUY | 71.00 | 54.20 | 31% | 175,834 | Dec-21 | 37.6 | 29.7 | 5.7 | 5.2 | 1.0 |
| Dali Foods | 3799 HK | NR | N/A | 3.74 | N/A | 51,216 | Dec-21 | 12.1 | 10.9 | 2.1 | 1.9 | 4.2 |

Summary

Yum China demonstrated strong performance in 2Q22, with sales and net profit exceeding expectations. The company is expected to see a turnaround in 2H22E, supported by a low base effect, reduced store closures, and improved per store economics. Despite ongoing costs pressures, the company's profitability is projected to improve due to better operating leverage and strong sales from new retail initiatives. The target price is raised to HK$450.06, based on a 30x P/E ratio for FY23E, which is not considered demanding. Store expansion targets remain unchanged, and the company's breakeven point has been lowered significantly. The earnings estimates have been revised upward, reflecting improved performance and cost control.