Yum China (YUMC US/9987 HK)

Short term weakness masks long term potential





Yum China 090222
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INVESMTENT HIGHLIGHT


Yum China (YUMC) typically grows in two ways. 1) It opens new stores, and 2) grows revenue at each store that is already open. YUMC’s shares have been sagging because same store sales have been shrinking. On the company’s last earnings call, it reported weaker-than-expected earnings. We do not think it will be too long before Yum China has two engines of growth again, and the current weak share price represents a buying opportunity.


ESSENTIALS

Share price weakness an opportunity to accumulate. YUMC/9987 is down post-4Q22 results – mainly due to weaker-than-expected earnings and outlook for the current quarter. Comparing to CNY holiday in 2021, same-store sales is down yoy on Covid lockdowns in China. Over 500 of its stores were temporarily closed or offered only takeaway and delivery services at the peak of the lockdowns in Jan, compared to close 300 stores last quarter. We view these measures as temporary. Chinese companies are developing mRNA vaccines which may provide the impetus for authorities to ease restrictions if they prove to be more effective at curtailing severe illness than existing ones. 


Plans to open 1,000-1,200 new stores this year. Yum China is the largest restaurant company in China and has the exclusive right to operate and sublicense the KFC, Pizza Hut and Taco Bell brands in China (excluding Hong Kong, Macau and Taiwan). It also owns the intellectual property of the Little Sheep, Huang Ji Huang, COFFii & JOY and East Dawning concepts outright. Yum China operated 8,168 KFC stores and 2,590 Pizza Hut stores as of end of 2021 and has plans to add 1,000-1,200 new stores this year. YUMC plans to add at least 1,000 stores per annum and has a long-term target of 20,000 stores across 2,700 cities. 


Growing emerging brands. Coffee: YUMC has three distinct coffee brands with clear segmentation and strategy. At KFC, K-Coffee offers good quality coffee at affordable prices. COFFii & JOY offers specialty coffee for coffee lovers utilizing an asset-light model. Finally, it has Lavazza - offering premium coffee and high-quality food offerings. YUMC expects to accelerate the store openings for Lavazza in China (65%-owned JV) – aiming for 1,000 stores from the 4Q21’s 58 by 2025.