Initiate BUY on YUMC, as we forecast 14% NP CAGR in FY19-22E (even under drags by COVID-19) vs 13% in FY16-19, driven by: 1) near term favorable food, staff and rental costs, 2) more new stores and better locations, 3) various longer-term benefits yield from digital upgrades and 4) Pizza Hut reforms. Our TP of US$ 72.61 is based on 36x FY21E P/E, 5% discount to leading China peer’s avg. but 16% higher than Int’l peers’ avg.. YUMC’s valuation is attractive at 29x FY21E P/E and 3.3x PEG, well below HDL’s 51x and 5.9x, JMJ’s 45x and 9.1x.
- A restaurant empire with leading product, digital and delivery quality. Yum China (“YUMC”) is the largest restaurant group in China by sales in 2019 (~1.4% market share). It owned 9,200 restaurants in China (6,534 KFC/ 2,281 Pizza Hut/ 385 others) and recorded USD 8.8bn sales and USD 700mn NP in FY19.
- Multiple near-term catalysts and too conservative consensus. We expect SSSG to turn positive to 14% YoY in FY21E, thanks to: 1) consumption recovery, 2) low base, 3) favourable food and staff cost trends, 4) superior digital and delivery upgrades and 5) better store locations and rental terms. More importantly, we believe our forecast is prudent while consensus is too conservative (CMBI’s FY21E sales is only 10-13% higher vs FY19 and sales per average store for KFC/ Pizza Hut are just 3% lower / 1% higher vs FY19).
- Digital and delivery upgrades to boost frequency and ASP. YUMC has vast customer base for big data. We expect the growth drivers to be: 1) customer acquisitions by better user experience and convenience, 2) increase in purchasing frequency from more members, 3) ASP increases thru more upselling and 4) brands’ cross-selling through membership reward system.
- Industry leading product quality and Pizza Hut reform. Backed by leading customer satisfaction rating among fried chicken brands, KFC should gain market shares in all tier cities in China. We also see Pizza Hut’s reform successful (menu innovations, return of value for money, stores revamps, etc. since 2017) and yield an impressive 13% restaurant OP CAGR in FY19-22E.
- We forecast 8% sales and 14% NP att. CAGR in FY20E-22E. Key drivers are: 1) delivery, 2) increases in members and purchasing frequency, 3) easing food, staff and rental costs, and 4) Pizza Hut’s reform and operating leverage.
- Initiate BUY with TP of US$ 72.61, based on 36x FY21E P/E, 5% discount to leading peers’ average. We find YUMC attractive given a 14% NP CAGR in FY19-22E (impressive enough given drags from COVID-19 and vs 14% in FY17-19). It is trading at 29x FY21E P/E and 3.3x PEG (based on FY20E P/E and FY19-22E NP CAGR), vs HDL’s 53x and 6.2x, JMJ’s 47x and 9.7x.
