20230504-招银国际-百胜中国-09987.HK-Confidence_increases_after_upbeat_1Q23_result_8页_1mb

Financial analysts from CMB International Global Markets upgraded their view on Yum China Holdings (ticker: 9987 HK) after its strong first-quarter 2023 performance. The report highlights that both sales and net profits exceeded expectations.

In the first quarter of 2023, Yum China reported a 9% year-on-year sales increase (17% in constant foreign exchange) to US$2.92bn, beating Bloomberg estimates by 4%. Net profit surged by 189% to US$289mn, up 51% from previous estimates. This was driven by improved gross profit margins (1.1 percentage points higher than estimates due to menu innovations, VAT reductions, and rental relief), significant operating leverage, staff cost savings, and lower depreciation expenses. The operating profit margin for KFC and Pizza Hut reached 22.2% and 14.2% respectively in Q1, surpassing 2019 levels.

The outlook for the second quarter 2023 is positive, with analysts expecting strong sales growth momentum, supported by promotions like Crazy Thursday and the gradual recovery of tourist attractions. This is expected to lead to catch-up growth, with potential to gain market share as consumers favor value-conscious offerings. The company aims to expand its store network with a net new store target of 1,100 to 1,300 for fiscal year 2023, after a slower start due to pandemic disruptions.

Analysts foresee further margin expansion in fiscal year 2023, underpinned by improved operating leverage, a healthier store portfolio (closing underperforming stores and opening efficient new ones), better labor productivity, and controlled rental expenses. Earnings for the year are revised upward, with estimated net profit for FY23E reaching US$905 million.

Based on these improvements, the analyst revised the target price to HK$595.15, up 18.1% from the previous HK$554.61, using a 35x forward price-to-earnings multiple. This is about two standard deviations above the five-year average P/E of 27x, reflecting an upcycle in the industry. Yum China is trading at 30x FY23E P/E, which is deemed reasonable.

Key valuation metrics: Current P/E ratio is 29.6, P/B ratio is 3.4, and the stock is rated "BUY" by CMBIGM. Financial data shows revenue, operating profit, and net profit growing steadily over the period, with indicative figures provided for 2020-2025.