Maintain BUY on YUMC, as we believe the drags in 1Q21E could be short-lived and mid-term growth story is still intact (KFC expansions and Pizza Hut reform). We lowered our TP to US$ 66.59, based on 36x FY21E P/E (unchanged). YUMC’s valuation is attractive at 31x FY21E P/E, vs HDL’s 74x and JMJ’s 77x.
- 4Q20 net profit beat. YUMC’s 4Q20 net profit grew by 68% YoY to US$ 151mn, beating BBG/ CMBI est. by 38%/ 59%, driven by robust sales growth of 11%, which is also ahead of BBG/ CMBI est. by 6%/ 6%. We attributed the beat to: 1) more-than-expected new stores of 356 (vs CMBI est. of 208), 2) lower-than-expected food costs and 3) better-than-expected government and rental reliefs. Hence operating profit grew by 90% YoY in 4Q20 (78% if we use constant FX).
- Cautious outlook for 1Q21E. Despite the resilient SSSG in 4Q20 (-4%/ -5% YoY for KFC/ Pizza Hut, roughly in-line with CMBI est.), management expects significant headwind in 1Q21E, due to: 1) stricter government measures on mini COVID outbreak and reduced social activities, 2) weaker travellers demand in transportation hubs and related locations and 3) weaker demand in lower tier cities as more workers are advised to stay put instead of returning to their hometowns. GP margin in 1Q21E may only be flattish vs 1Q20, as benefits from lower poultry prices will be offset by more value campaign to attract traffic, lower delivery demand (small ticket sizes and less high margin items) and adoption of eco-friendly packaging materials since FY21E.
- Gradual recovery throughout FY21E is still valid but EBIT margin may remain subdued. YUMC’s mid-term growth story, in our view, is still intact given its superior execution, product innovation and digital capability. We are still expecting a sequential improvement onwards, but the management also flagged that EBIT margin in FY21E may not be able to return to FY19E level, due to absence of government and rental reliefs and needs to hire more staffs.
- KFC to speed up expansion and Pizza Hut’s improvement continue. YUMC also target gross openings of 1,000+ stores in FY21E (ahead of CMBI est. of 900) while Pizza Hut should have a stronger rebound in FY21E, driven by menu upgrades (75%+ SKUs were new or upgraded since 2Q20), return of value for money, more remodelling (40%+ stores since FY18) and better digital (tableside ordering mix reached 37% in 4Q20) and delivery experience.
- Maintain BUY but lower TP to US$ 66.59, based on 36x FY21E P/E (unchanged). We revised down FY21E/ 22E NP forecast by 8%/ 8%, to factor in: 1) a weaker 1Q21 sales, 2) higher capex, 3) higher staff and rental costs but 4) a faster store openings. YUMC is trading at 31x FY21E P/E, attractive vs HDL’s 74x and JMJ’s 77x, given a 21% EBIT CAGR in FY20-23E.
