Maintain BUY on YUMC, as we are impressed by robust dine-in sales growth GP margin and Pizza hut’s momentum, despite mini covid-19 outbreaks and weak sales in transportation hubs in 1Q21. Hence we are increasingly optimistic for FY21E. We raised our TP to HK$ 595.39, based on 33x FY21E P/E (unchanged). YUMC’s valuation is attractive at 27x FY22E P/E, vs HDL’s 38x and JMJ’s 50x.
- A strong beat in 1Q21 net profit. YUMC’s 1Q21 net profit grew by 272% YoY to US$ 230mn, 24%/ 27% above BBG/ CMBI est., backed by 46% YoY sales growth, which also beat BBG/ CMBI est. by 15%/ 18%. We attributed this beat to: 1) meaningful dine-in sales growth (53%/109% YoY for KFC/ Pizza hut), 2) robust GP margin at 72.5% (vs CMBI est. of 71.6%), 3) rigid admin cost control and 4) impressive Pizza Hut with 38% SSSG and restaurant margin of 15.3% in 1Q21 (higher than 14.3% in 1Q19). We are truly impressed by strong sales growth as it was achieved under various drags, such as: 1) mini COVID-19 outbreaks in Jan 2021, 2) weak sales in transportation hubs (fell by ~40% vs 2020 and ~70% in 2019) and 3) weak demand in lower tier cities as many workers stayed put during CNY.
- We are cautiously optimistic for 2Q21E and onwards. Following the rather encouraging 1Q21, where SSS for KFC/ Pizza Hut already recovered to 94%/ 95%, vs 1Q19. we are reasonably positive for 2Q21E, thanks to: 1) improved domestic travel volume and consumer sentiment during Qing Ming festival (hopefully same for upcoming labour day holidays), 2) low base in 2Q20 and 3) Pizza Hut’s overwhelming growth momentum, driven by store remodelling (over 50% were revamped since 2018), menu upgrade (renewed 40% of items in 1Q21) and strengthened digital and delivery experience.
- But management highlighted more headwinds on margins. Decline in poultry price might have fueled GP margin expansion in 1Q21 and continue to be favorable for 2Q21E, thanks to the lock-ups. However, there could be more pressure in 2H21E due to: 1) rebounding input prices, 2) phasing out of plastic items and 3) wage inflations and more hiring, etc..
- Store expansion plan maintained despite acceleration in 1Q21. Number of stores for KFC/ Pizza Hut had a net increase by 207/ 27 to 7,373/ 2,382 in 1Q21, up 10.7%/ 4.9% YoY, which speeded up from 9.7%/ 3.2% in 4Q20, but the Company maintained its gross openings target of 1,000 in FY21E.
- Maintain BUY and raised TP to HK$ 595.39, based on 33x FY22E P/E (unchanged). We revised up FY21E/ 22E/ 23E NP forecast by 6%/ 5%/ 3%, to factor in: 1) faster dine-in growth, 2) better Pizza Hut growth and margins, 3) stronger operating leverage. YUMC is trading at 27x FY22E P/E, attractive vs HDL’s 38x and JMJ’s 50x, given a 16% EBIT CAGR in FY20-23E.
