Forensic Analyst

Jason Yap, CFA

Forensic Accounting

Yum China Holdings  / Forensic Accounting

<ul>
<li>Yum China opened 563 stores in the fourth quarter and 1,806 stores in all 2021, bringing its total store count to 11,788 at the end of last year</li>
<li>While the brisk rate of new store openings helped Yum China achieve revenue growth in Q4 2021, the persistent weakness in SSSG and restaurant margins are causes of concern</li>
<li>Investors should monitor whether store expansion is accompanied by a corresponding decline in key operating metrics. If so, there could be parallels with Haidilao</li>
</ul>


Yum China opened 563 stores in the fourth quarter and 1,806 stores in all 2021, bringing its total store count to 11,788 at the end of last year
While the brisk rate of new store openings helped Yum China achieve revenue growth in Q4 2021, the persistent weakness in SSSG and restaurant margins are causes of concern
Investors should monitor whether store expansion is accompanied by a corresponding decline in key operating metrics. If so, there could be parallels with Haidilao


Yum China (YUMC US) - Store Expansion Edged Revenue Growth

China and US Equity Analyst

Roger Xie

Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/yum-china-holdings-inc" target="_blank" data-smartkarma-citation="entities:23677:1" rel="noopener">Yum China Holdings, Inc (YUMC US)</a> reported below-expectation 4Q21 earnings. Same store sale growth was down 11% year-over-year due to recent resurging of COVID cases in several regions of China.</li>
<li>Yum China has leveraged its digital orders and delivery service to alleviate the impacts. Based on its operation in 1Q20, we believe Yum China could recover quickly from current outbreak.</li>
<li>We think risk/reward is more compelling to own <a href="https://www.smartkarma.com/entities/yum-china-holdings-inc" target="_blank" data-smartkarma-citation="entities:23677:1" rel="noopener">Yum China Holdings, Inc (YUMC US)</a> as it has resilient business model and proven records to navigate through pandemic. </li>
</ul>



Yum China Holdings, Inc (YUMC US) reported below-expectation 4Q21 earnings. Same store sale growth was down 11% year-over-year due to recent resurging of COVID cases in several regions of China.
Yum China has leveraged its digital orders and delivery service to alleviate the impacts. Based on its operation in 1Q20, we believe Yum China could recover quickly from current outbreak.
We think risk/reward is more compelling to own Yum China Holdings, Inc (YUMC US) as it has resilient business model and proven records to navigate through pandemic. 


Yum China (YUMC.US/​9987.HK): Zero-COVID Policy Weighted on Earnings

<ul>
<li>The latest wave of COVID-19 infections cast a shadow on store traffic recovery for transportation hubs. Looking forward, there will likely more tightening preventive measurement into Chinese New Year.</li>
<li>
<a href="https://www.smartkarma.com/entities/yum-china-holdings-inc" target="_blank" data-smartkarma-citation="entities:23677:1" rel="noopener">Yum China Holdings, Inc (YUMC US)</a> has corrected 30% from its high since July due to the resurge of COVID cases in several cities in China 2nd half of year. </li>
<li>We think risk/reward is more compelling to own <a href="https://www.smartkarma.com/entities/yum-china-holdings-inc" target="_blank" data-smartkarma-citation="entities:23677:1" rel="noopener">Yum China Holdings, Inc (YUMC US)</a> as it has resilient business model and proven records to navigate through pandemic. </li>
</ul>


The latest wave of COVID-19 infections cast a shadow on store traffic recovery for transportation hubs. Looking forward, there will likely more tightening preventive measurement into Chinese New Year.

Yum China Holdings, Inc (YUMC US) has corrected 30% from its high since July due to the resurge of COVID cases in several cities in China 2nd half of year. 
We think risk/reward is more compelling to own Yum China Holdings, Inc (YUMC US) as it has resilient business model and proven records to navigate through pandemic. 


Yum China (YUMC.US/9987.HK): Resilient Business Model in the Face of Rising COVID Cases

<ul>
<li>The resurgence of COVID-19 cases has again put the Chinese restaurant sector under pressure. <a href="https://www.smartkarma.com/entities/yum-china-holdings-inc" target="_blank" data-smartkarma-citation="entities:23677:1" rel="noopener">Yum China Holdings, Inc (YUMC US)</a> released a business update last night. The latest outbreak of COVID-19 Delta variant in China has caused more than 500 of Yum China stores in 17 provinces closed or offering only takeaway and delivery services. Same-store sales in August 2021 declined by mid-teens percentage year over year, or close to an approximately 20% decline compared to August 2019 (or mid-teen decline on year-over-year basis).  Based on current trend, the Company has experienced significant operating deleveraging, adjusted operating profit, which excludes special items, may be reduced by approximately 50% to 60% for the third quarter of 2021, compared to the same period last year. </li>
<li>Other casual dining companies have experienced similar pullback  given the wide spread of Delta variants in China and record flooding in some areas. For example, <a href="https://www.smartkarma.com/entities/jiumaojiu-international-holdings-limited" target="_blank" data-smartkarma-citation="entities:28293:1" rel="noopener">Jiumaojiu (9922 HK)</a> Tai Er restaurants and Jiu Mao Jiu restaurants have seen around 10% and 20% decline of same-store sale respectively compared with pre-COVID 2019. <a href="https://www.smartkarma.com/entities/haidilao-international-holding-ltd" target="_blank" data-smartkarma-citation="entities:27044:1" rel="noopener">Haidilao (6862 HK)</a> experienced about 30% decline of same-store sale compared with pre-COVID 2019. We believe the latest surge of COVID-19 has the bigger impact on transportation hubs and tourist locations.</li>
<li>To put the comparison in the same context, <a href="https://www.smartkarma.com/entities/yum-china-holdings-inc" target="_blank" data-smartkarma-citation="entities:23677:1" rel="noopener">Yum China Holdings, Inc (YUMC US)</a> recorded 40-50% same-store sale decline during the initial COVID outbreak in February 2020. Apparently, the scale of recent outbreak is not as big as the initial one. We expect that Yum China is more experienced this time to utilize delivery and take-out options as well. The company is using technology to foster brand loyalty and drive more consistent traffic. Yum China had 330 million members on its rewards app. This has facilitated the shift of sales to various digital platforms (more than 84% of sales were digital in 2020) and enabled the company to collect a vast amount of consumer data.  Through analyzing this data, the group is trying to lock in its customers through personalized menu creations based on each diner’s past order history and local tastes. We continue to believe <a href="https://www.smartkarma.com/entities/yum-china-holdings-inc" target="_blank" data-smartkarma-citation="entities:23677:1" rel="noopener">Yum China Holdings, Inc (YUMC US)</a> offers investors better reward/risk potential in China restaurant sector. We reiterate TP US$72 for Yum China, which is based on 30x 2021e P/E. </li>
</ul>


The resurgence of COVID-19 cases has again put the Chinese restaurant sector under pressure. Yum China Holdings, Inc (YUMC US) released a business update last night. The latest outbreak of COVID-19 Delta variant in China has caused more than 500 of Yum China stores in 17 provinces closed or offering only takeaway and delivery services. Same-store sales in August 2021 declined by mid-teens percentage year over year, or close to an approximately 20% decline compared to August 2019 (or mid-teen decline on year-over-year basis).  Based on current trend, the Company has experienced significant operating deleveraging, adjusted operating profit, which excludes special items, may be reduced by approximately 50% to 60% for the third quarter of 2021, compared to the same period last year. 
Other casual dining companies have experienced similar pullback  given the wide spread of Delta variants in China and record flooding in some areas. For example, Jiumaojiu (9922 HK) Tai Er restaurants and Jiu Mao Jiu restaurants have seen around 10% and 20% decline of same-store sale respectively compared with pre-COVID 2019. Haidilao (6862 HK) experienced about 30% decline of same-store sale compared with pre-COVID 2019. We believe the latest surge of COVID-19 has the bigger impact on transportation hubs and tourist locations.
To put the comparison in the same context, Yum China Holdings, Inc (YUMC US) recorded 40-50% same-store sale decline during the initial COVID outbreak in February 2020. Apparently, the scale of recent outbreak is not as big as the initial one. We expect that Yum China is more experienced this time to utilize delivery and take-out options as well. The company is using technology to foster brand loyalty and drive more consistent traffic. Yum China had 330 million members on its rewards app. This has facilitated the shift of sales to various digital platforms (more than 84% of sales were digital in 2020) and enabled the company to collect a vast amount of consumer data.  Through analyzing this data, the group is trying to lock in its customers through personalized menu creations based on each diner’s past order history and local tastes. We continue to believe Yum China Holdings, Inc (YUMC US) offers investors better reward/risk potential in China restaurant sector. We reiterate TP US$72 for Yum China, which is based on 30x 2021e P/E. 


Yum China (YUMC and 9987.HK): Short-Term Pressure Due to Resurge of COVID Cases in China

<ul>
<li>The most positive surprise from <a href="https://www.smartkarma.com/entities/yum-china-holdings-inc" target="_blank" data-smartkarma-citation="entities:23677:1" rel="noopener">Yum China Holdings, Inc (YUMC US)</a> 2021Q2 earning call is its step-up of new store openings in the quarter and management's projection. The company added 404 new stores and total store counts is up 11% year-over-year. More impressively, management targeted to open 1300 stores (up from prior 1000 stores) this year. If this new store openings trajectory will stay, <a href="https://www.smartkarma.com/entities/yum-china-holdings-inc" target="_blank" data-smartkarma-citation="entities:23677:1" rel="noopener">Yum China Holdings, Inc (YUMC US)</a> store counts will delivery 10% annual growth rate, which could be the big positive for Yum China long-term profitability. </li>
<li>2021 Q2 system sales are up 14% year-over-year (or 9% above 2019 Q2), and adjusted operating profits (ex-FX) are up 63% year-over-year. Even though KFC's same-store sales were still 7% behind pre-COVID-19 levels, the company was able to offset weaker unit economics with accelerated store openings. Pizza Hut’s accelerating recovery is also a positive surprise. During the same period, commodity costs declining 7% year-over-year. </li>
<li>As China steps up its effort to curb tech giants (such as <a href="https://www.smartkarma.com/entities/didi-chuxing-inc" target="_blank" data-smartkarma-citation="entities:27467:1" rel="noopener">DiDi Global (DIDI US)</a> , <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a> ), the delivery riders' benefits have come to the spotlight. <a href="https://www.smartkarma.com/entities/yum-china-holdings-inc" target="_blank" data-smartkarma-citation="entities:23677:1" rel="noopener">Yum China Holdings, Inc (YUMC US)</a> owns its delivery fleet and it confirmed to be compliant with applicable laws and regulations. YUMC believes they pay competitive rates to their riders and raised staff wages by 2-3% year-over-year in 1H21. We believe the policy impact on rider benefits is limited.  We continue to believe <a href="https://www.smartkarma.com/entities/yum-china-holdings-inc" target="_blank" data-smartkarma-citation="entities:23677:1" rel="noopener">Yum China Holdings, Inc (YUMC US)</a> offers investors better reward/risk potential in China restaurant sector. We reiterate TP US$72 for Yum China, which is based on 30x 2021e P/E. </li>
</ul>


The most positive surprise from Yum China Holdings, Inc (YUMC US) 2021Q2 earning call is its step-up of new store openings in the quarter and management's projection. The company added 404 new stores and total store counts is up 11% year-over-year. More impressively, management targeted to open 1300 stores (up from prior 1000 stores) this year. If this new store openings trajectory will stay, Yum China Holdings, Inc (YUMC US) store counts will delivery 10% annual growth rate, which could be the big positive for Yum China long-term profitability. 
2021 Q2 system sales are up 14% year-over-year (or 9% above 2019 Q2), and adjusted operating profits (ex-FX) are up 63% year-over-year. Even though KFC's same-store sales were still 7% behind pre-COVID-19 levels, the company was able to offset weaker unit economics with accelerated store openings. Pizza Hut’s accelerating recovery is also a positive surprise. During the same period, commodity costs declining 7% year-over-year. 
As China steps up its effort to curb tech giants (such as DiDi Global (DIDI US) , Alibaba Group (BABA US) ), the delivery riders' benefits have come to the spotlight. Yum China Holdings, Inc (YUMC US) owns its delivery fleet and it confirmed to be compliant with applicable laws and regulations. YUMC believes they pay competitive rates to their riders and raised staff wages by 2-3% year-over-year in 1H21. We believe the policy impact on rider benefits is limited.  We continue to believe Yum China Holdings, Inc (YUMC US) offers investors better reward/risk potential in China restaurant sector. We reiterate TP US$72 for Yum China, which is based on 30x 2021e P/E. 


Yum China (YUMC and 9987.HK): Accelerating New Store Openings to Improve Long-Term Profitability

China

Yum China Holdings, Inc. operates chain restaurants. The Company offers pizza, entrees, pasta, rice dishes, appetizers, soups, vegetables, beverages, and desserts. Yum China Holding conducts its business worldwide.

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Yum China Holdings (YUMC US)

Yum China (YUMC US) - Store Expansion Edged Revenue Growth

Yum China's brisk rate of new store openings helped it achieve revenue growth in Q4 2021. However, the weakness in SSSG and restaurant margins are...

Jason Yap, CFA

Yum China (YUMC.US/9987.HK): Zero-COVID Policy Weighted on Earnings

Yum China reported disappointing 4Q21 earnings due to resurging of COVID cases in China. But we think risk/reward is more compelling as Yum China...

Roger Xie

Yum China (YUMC.US/9987.HK): Resilient Business Model in the Face of Rising COVID Cases

We think any share price weakness creates a good opportunity to accumulate Yum China. The risk/reward is more compelling given it has resilient...

Roger Xie

Yum China (YUMC and 9987.HK): Short-Term Pressure Due to Resurge of COVID Cases in China

We believe Yum China Holdings can successfully navigated through the recent surge of COVID cases and can generate sales through delivery and other...

Roger Xie

Yum China (YUMC and 9987.HK): Accelerating New Store Openings to Improve Long-Term Profitability

We believe that Yum China store counts will delivery 10% annual growth rate, which could be the big positive for Yum China long-term profitability.

Roger Xie

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Yum China (YUMC US) - Store Expansion Edged Revenue Growth

Yum China's brisk rate of new store openings helped it achieve revenue growth in Q4 2021. However, the weakness in SSSG and restaurant margins are...

Jason Yap, CFA

Yum China (YUMC.US/​9987.HK): Zero-COVID Policy Weighted on Earnings

Yum China reported disappointing 4Q21 earnings due to resurging of COVID cases in China. But we think risk/reward is more compelling as Yum China...

Roger Xie

Yum China (YUMC.US/9987.HK): Resilient Business Model in the Face of Rising COVID Cases

We think any share price weakness creates a good opportunity to accumulate Yum China. The risk/reward is more compelling given it has resilient...

Roger Xie

Yum China (YUMC and 9987.HK): Short-Term Pressure Due to Resurge of COVID Cases in China

We believe Yum China Holdings can successfully navigated through the recent surge of COVID cases and can generate sales through delivery and other...

Roger Xie

Yum China (YUMC and 9987.HK): Accelerating New Store Openings to Improve Long-Term Profitability

We believe that Yum China store counts will delivery 10% annual growth rate, which could be the big positive for Yum China long-term profitability.

Roger Xie

Yum China (YUMC.US/9987.HK): Zero-COVID Policy Weighted on Earnings