Investment Rating - The report maintains a "BUY" rating for Yum China with a target price of HK$294.91, reflecting a 16.7% upside from the current price of HK$252.80 [2][3][17]. Core Insights - Despite a sales growth miss in 2Q24, Yum China achieved a significant net profit beat, driven by effective cost management and operational efficiency initiatives. The company is expected to see a turnaround in 4Q24E [2][7]. - The report expresses caution regarding topline growth in 2H24E due to a high base and weak macroeconomic conditions, projecting same-store sales growth (SSSG) for KFC and Pizza Hut at -3% and -6% in 3Q24E, respectively, and a modest recovery in 4Q24E [2][7]. - Bottom-line growth is expected to be more stable, with operating profit margins anticipated to remain at least stable in FY24E due to various cost-saving initiatives [2][7]. Financial Summary - Revenue for FY24E is projected at US$11,129 million, with a year-over-year growth of 1.4%. Net profit is expected to reach US$869.2 million, reflecting a 7% increase [3][8]. - The earnings per share (EPS) for FY24E is estimated at US$2.11, with a projected P/E ratio of 15.4x [3][8]. - The report highlights a significant increase in net profit for 2Q24, which rose by 8% to US$212 million, exceeding estimates due to resilient gross profit margins and stable operating expenses [7][8]. Operational Initiatives - Yum China is implementing several projects aimed at improving operational efficiency, including Project Fresh Eye and Project Red Eye, which focus on simplifying operations and enhancing supply chain efficiency [2][9]. - The company plans to open 1,500 to 1,700 new stores in FY24E, maintaining its capital expenditure target of US$700 million to US$850 million [7][8]. - The introduction of new store formats, such as K-coffee and Pizza Hut's WOW model, is expected to drive incremental sales and profitability [2][9][12]. Market Position - Yum China's market capitalization is approximately HK$97.8 billion, with a shareholding structure that includes significant stakes from JPMorgan Chase & Co. and Invesco Advisers, Inc. [4][17]. - The company is positioned favorably within the China Consumer Discretionary sector, with a competitive edge in cost management and operational efficiency [2][3][17].

Investment Rating - The report maintains a "Buy" rating for Yum China (9987 HK) with a target price of HKD 359.30 [4][5]. Core Insights - In Q2 2024, Yum China reported a net profit of USD 212 million, exceeding previous expectations, with revenue of USD 2.68 billion, a year-on-year increase of 1% [1][2]. - The core operating profit reached USD 275 million, reflecting a year-on-year growth of 12%, with a core net profit margin of 10.0%, up 0.7 percentage points year-on-year [1][2]. - The company is focusing on enhancing its digital capabilities and optimizing operational efficiency, which is expected to strengthen growth resilience [1][3]. Summary by Sections Financial Performance - Q2 2024 revenue was USD 2.68 billion, with a year-on-year increase of 1% (4% excluding foreign currency effects) [1]. - Core operating profit was USD 275 million, up 12% year-on-year, with a core net profit margin of 10.0% [2]. - The company achieved a net profit of USD 212 million, an 8% increase year-on-year, outperforming prior forecasts [1][2]. Store Expansion and Innovation - In Q2 2024, Yum China opened 401 new stores, with 99 being franchise locations, bringing the total store count to 15,423 [3]. - The company is expanding its KFC and Pizza Hut brands, with a focus on innovative store formats like KCoffee and the WOW store model for Pizza Hut [3]. - The franchise model is enhancing penetration in remote and hub areas, with KCoffee expected to reach 500-600 locations by the end of 2024 [3]. Future Earnings Projections - EPS estimates for 2024, 2025, and 2026 are projected at USD 2.19, USD 2.42, and USD 2.71 respectively [4][6]. - The target price of HKD 359.30 is based on a 21x PE ratio for 2024, reflecting the company's strong market position and resilience [4][6].

Investment Rating - The report maintains a "Buy" rating for the company, with an expected PE ratio of 14.3X for 2024E, 13.0X for 2025E, and 11.8X for 2026E [1] Core Views - The company's 2Q24 revenue reached $2.68 billion, a 1% YoY increase (4% excluding currency impact), with core operating profit at $280 million (+12% excluding currency impact) and net profit attributable to shareholders at $210 million (+8%, +11% excluding currency impact) [1] - Store expansion supported revenue growth, with net new stores contributing 8% to system sales, while same-store sales declined by 4% due to demand pressure [1] - The company's total number of stores reached 15,423 by 2Q24, with a net increase of 401 stores in the quarter [1] - KFC's same-store sales declined by 3% in 2Q24, with a restaurant margin of 16.2% (-1.1pct, -0.6pct excluding comparable items) [1] - Pizza Hut's same-store sales declined by 8% in 2Q24, but restaurant margin improved to 13.2% (+0.8pct, +1.1pct excluding comparable items) [1] - The company returned $994 million to shareholders through dividends and buybacks in 1H24, with plans to distribute $250 million in cash dividends and $1.25 billion in buybacks for the full year 2024 [1] Financial Performance Summary - Revenue is projected to grow from $11.311 billion in 2024E to $13.483 billion in 2026E, with a CAGR of 8.78% [3] - Net profit attributable to shareholders is expected to increase from $874 million in 2024E to $1.059 billion in 2026E, with a CAGR of 9.78% [3] - ROE is forecasted to improve from 15.16% in 2024E to 18.39% in 2026E [3] - The company's P/E ratio is expected to decline from 14.31X in 2024E to 11.82X in 2026E, indicating potential undervaluation [3] Operational Highlights - KFC's K-Coffee store count increased from around 100 in March to approximately 300 by July, leveraging shared kitchen and labor resources for higher efficiency [1] - Pizza Hut's WOW stores, offering lower-priced products, expanded to over 100 locations by July, targeting cost-conscious customers [1] - The company achieved significant cost optimization through automation, labor savings, and improved management efficiency, with overall restaurant margin at 15.5% and management expense ratio at 5.0% in 2Q24 [1]

Earnings & Revenue - Adjusted earnings per share of 55 cents beat the Zacks Consensus Estimate of 47 cents by 17%, with a 17% year-over-year increase [2] - Total revenues of $2.68 billion missed the consensus mark of $2.77 billion by 3.3%, but inched up 1% year-over-year [2] - Excluding foreign currency translation, revenues increased 4% year-over-year [2] - Total system sales (excluding foreign currency translation) increased 4% year-over-year, driven by an 8% net new unit contribution [2] - KFC system sales increased 5% year-over-year, while Pizza Hut system sales increased 1% year-over-year [2] - Same-store sales reached 96% of the previous year's level, with same-store transactions growing 4% year-over-year [2] Operating Performance - Total costs and expenses amounted to $2.413 billion, compared to $2.397 billion in the prior-year quarter [3] - Restaurant margin was 15.5%, down from 16.1% a year ago [3] - Adjusted operating profit totaled $266 million, up from $259 million a year ago [3] - Adjusted net income amounted to $212 million, compared to $199 million in the prior-year quarter [3] Balance Sheet & Shareholder Returns - Cash and cash equivalents were $1.043 billion as of Jun 30, 2024, down from $1.128 billion as of Dec 31, 2023 [4] - Net inventories were $362 million, compared to $424 million as of Dec 31, 2023 [4] - The company repurchased 5.1 million shares for $187 million in the second quarter [4] - As of Jun 30, the company had $666 million available for future share repurchases under the current authorization program [4] - A quarterly cash dividend of 16 cents per common share was declared, payable on Sep 17, 2024 [4] Unit Development & Digital Performance - Yum China opened 401 net new stores in the second quarter, bringing the total restaurant count to 15,423 [5] - KFC stores totaled 10,931, while Pizza Hut stores reached 3,504 [5] - Delivery contributed approximately 38% to KFC and Pizza Hut's company sales [5] - Digital orders accounted for about 90% of total company sales, with 89% for KFC and 93% for Pizza Hut [5] - Loyalty programs of KFC and Pizza Hut grew to more than 495 million members [5] 2024 Outlook - Yum China projects net new store openings to be in the range of 1,500-1,700 [6] - Capital expenditures are projected to be between $700 million and $850 million [6] Industry Updates - The Wendy's Company reported dismal second-quarter fiscal 2024 results, with earnings and revenues missing estimates, despite solid same-restaurant sales and digital sales momentum [7] - Shake Shack Inc posted decent second-quarter fiscal 2024 results, with earnings meeting estimates and revenues beating them, driven by product innovations and strategic menu pricing [8] - The Cheesecake Factory Incorporated reported second-quarter fiscal 2024 results, with earnings beating estimates and revenues missing them, benefiting from strong demand and new restaurant openings [9]

Yum posted strong margin expansion in its second-quarter report.Shares of Yum China (YUMC 11.83%) were moving higher today after the company reported better-than-expected results in its second-quarter earnings report, overcoming consumer weakness in China.As of 11:07 a.m. ET, the stock was up 13.2%. Yum China overcomes a low barThe Chinese operator of KFC and Pizza Hut said that same-store sales were down 4% in the quarter, but overall revenue increased 1% to $2.68 billion, driven by new store openings and ...

Financial Data and Key Metrics Changes - Yum China reported record levels of revenue, operating profit, and EPS for Q2 2024, with revenue of $2.68 billion, operating profit of $266 million, and diluted EPS of $0.55, marking a 19% increase year-over-year [4][22][27] - System sales grew 4% year-over-year, following a 32% growth in the same period last year, while core operating profit increased by 12% to $275 million [4][22] - Total transactions grew by 13%, and same-store transactions increased by 4% year-over-year [22] Business Line Data and Key Metrics Changes - KFC system sales increased by 5% year-over-year, with same-store sales at 97% of prior year levels, and same-store traffic growth of 4% [24] - Pizza Hut system sales rose by 1% year-over-year, with same-store sales at 92% of the prior year level, and traffic growth of 2% [24] - K-Coffee sales exceeded RMB 1 billion in the first half of 2024, up 26% year-over-year, with nearly 120 million cups sold, a 36% increase year-over-year [11][12] Market Data and Key Metrics Changes - The Eastern Power region in China remains the most resilient, with lower-tier cities recovering faster than higher-tier cities [39] - Residential locations are more resilient, while shopping centers are approaching pre-pandemic levels [39] Company Strategy and Development Direction - The company is focusing on operational efficiency through initiatives like Project Fresh Eye and Project Red Eye, which aim to improve cost structure and supply chain efficiency [7][8][10] - New business models such as K-Coffee and Pizza Hut WOW are being emphasized, with plans to expand these concepts significantly by year-end [10][16][28] - The company aims to maintain a balanced approach to pricing strategy, focusing on driving traffic while also offering higher ticket items [68] Management's Comments on Operating Environment and Future Outlook - Management acknowledges the challenging market conditions but emphasizes the importance of adapting and turning challenges into opportunities [40][62] - The company expects to continue investing in value for money and product innovations to drive transaction growth [28][62] - Management remains cautiously optimistic about the second half of the year, noting that while comparisons will be easier, the operating environment remains complex [58][62] Other Important Information - The company opened a record 779 net new stores in the first half of the year, reaching a total of 15,423 stores [29][30] - Yum China plans to return $1.5 billion to shareholders, having already returned nearly $1 billion in the first half [30] Q&A Session Summary Question: Insights on new business format and store concept - Management expressed excitement about the K-Coffee and WOW models, focusing on these two concepts for the remainder of the year, with initial results being encouraging [32][33] Question: Trends in same-store sales and market tier differences - Management noted that lower-tier cities are recovering faster than higher-tier cities, with residential locations showing resilience [39][40] Question: Margin details and cost structure - Management highlighted that proactive cost structure adjustments and operational efficiency initiatives have stabilized margins, with a focus on long-term structural changes [44][46][50] Question: Pricing strategy for KFC and Pizza Hut - Management confirmed a balanced approach to pricing, with a focus on driving traffic while maintaining a steady ticket average for KFC [68] Question: Consideration of disposing small businesses - Management is continuously reviewing the portfolio of smaller businesses and will make decisions based on efficiency and resource allocation [72]

Financial Performance - Total revenue reached a record high of $2.68 billion, a year-over-year increase of 1%[2] - Same-store sales volume grew by 4%, achieving 96% of last year's level[3] - Operating profit increased by 4% to $266 million, marking a second-quarter record[3] - Core operating profit rose by 12% to $275 million[3] - Digital order revenue amounted to $2.2 billion, accounting for approximately 90% of restaurant revenue[3] - Shareholder returns approached $1 billion year-to-date, exceeding the total for 2023[3] - The restaurant profit margin was stable at 15.5%, with operational efficiency improvements[3] - Total revenue for the six months ended June 30, 2024, was $5,637 million, a 1% increase compared to $5,571 million for the same period in 2023[18] - Company restaurant revenue for the quarter was $2,528 million, slightly up from $2,517 million, with a year-to-date total of $5,322 million compared to $5,289 million[18] - Net profit for the quarter was $228 million, representing a 7% increase from $214 million in the same quarter last year[18] - The effective tax rate for the quarter was 25.2%, up from 24.7% in the same quarter last year[18] - Basic earnings per share for the quarter were $0.55, compared to $0.47 in the same quarter last year, reflecting an increase of 17%[18] - The total costs and expenses for the quarter were $2,413 million, a slight increase from $2,397 million in the same quarter last year[18] - The company reported a restaurant profit margin of 15.5%, down from 16.1% in the same quarter last year[18] - KFC's total revenue for the quarter ended June 30, 2024, was $2,014 million, a 2% increase from $1,984 million in the same quarter of 2023[19] - Pizza Hut's total revenue for the quarter ended June 30, 2024, was $7 million, a 36% increase from $5 million in the same quarter of 2023[20] - KFC's operating profit for the six months ended June 30, 2024, was $636 million, down 8% from $693 million in the same period of 2023[19] - Pizza Hut's operating profit for the six months ended June 30, 2024, was $87 million, a decrease of 4% from $90 million in the same period of 2023[20] - KFC's restaurant profit margin decreased to 16.2% from 17.3% year-over-year[19] - Pizza Hut's restaurant profit margin improved to 13.2% from 12.4% year-over-year[20] Store Expansion and Operations - The total number of stores reached 15,423, with a net addition of 401 stores in the quarter[3] - The company aims to add approximately 1,500 to 1,700 new stores in fiscal year 2024[11] - System sales for KFC increased by 5% year-over-year, driven by an 8% contribution from net new store openings[6] - KFC's operating profit reached $264 million, with core operating profit at $273 million, reflecting a 4% year-over-year growth[7] - Pizza Hut's system sales grew by 1% year-over-year, supported by an 8% increase in net new store openings[8] - Yum China operates over 15,000 restaurants across more than 2,100 cities in China, employing approximately 400,000 staff[16] - The number of KFC restaurants increased to 9,740 as of June 30, 2024, from 9,237 at the end of 2023, representing a growth of 5.43%[24] - The number of Pizza Hut restaurants increased to 3,504 as of June 30, 2024, from 3,312 at the end of 2023, indicating a growth of 5.79%[24] Shareholder Returns and Financial Strategy - The company repurchased approximately 5.1 million shares for a total of $187 million in the second quarter[10] - The board declared a cash dividend of $0.16 per share, payable on September 17, 2024[10] - The company plans to return a record $1.5 billion to shareholders through dividends and stock buybacks[11] - The company repurchased ordinary shares amounting to $869 million during the financing activities for the six months ended June 30, 2024[22] Cost Management and Efficiency - The company is committed to maintaining cost control and managing expenses effectively in a changing economic environment[15] - KFC's food and packaging costs increased by 4% to $626 million compared to $602 million in the same quarter of 2023[19] - KFC's employee benefits costs were $513 million, up 3% from $498 million in the same quarter of 2023[19] - The company provides non-GAAP financial metrics including adjusted operating profit, adjusted net profit, adjusted earnings per share, adjusted effective tax rate, and adjusted EBITDA[25] - The company believes that presenting these non-GAAP metrics provides additional information for investors to compare past and current performance[25] Future Outlook and Innovation - The company plans to leverage automation and AI to enhance operational efficiency and expand market share[4] - Future performance outlook includes expectations for continued growth and innovation in marketing and product development[15] - The company is focused on expanding its digital capabilities and membership programs to enhance customer engagement[16] - The company plans to continue expanding its market presence and investing in new product development[18] - The company is focusing on enhancing operational efficiency and exploring potential acquisitions to strengthen its market position[36] Food Safety and Quality Control - The company emphasizes the importance of food safety and quality control systems in its operations[15] Financial Metrics and Definitions - Restaurant profit is defined as total restaurant revenue minus direct costs associated with generating that revenue, including food and packaging costs, salaries and employee benefits, rent, depreciation, advertising, and other operating expenses[25] - The restaurant profit margin is calculated as restaurant profit divided by total restaurant revenue, providing insights into the profitability of self-operated restaurants[25] - Core operating profit is adjusted for special items and further excludes items affecting comparability and foreign currency translation effects[26] - The core operating profit margin is defined as core operating profit divided by total revenue excluding foreign currency translation effects[26] - Special items excluded from the adjusted metrics include temporary subsidies from owners and government agencies, VAT adjustments due to tax policy changes, and amortization of reacquired franchise rights recognized during acquisitions[26]

[Second Quarter 2024 Performance Overview](index=1&type=section&id=Second%20Quarter%202024%20Performance%20Overview) [Financial & Operational Highlights](index=1&type=section&id=Financial%20%26%20Operational%20Highlights) The company reported record Q2 revenue and operating profit, driven by new unit contribution and transaction growth despite lower same-store sales Q2 2024 Key Financial Metrics (YoY) | Metric | Q2 2024 | % Change (Reported) | % Change (Ex-F/X) | | :--- | :--- | :--- | :--- | | Total System Sales | - | 4% | 4% | | Total Revenues | $2.68 billion | 1% | 4% | | Same-Store Sales | - | (4%) | (4%) | | Operating Profit | $266 million | 4% | 7% | | Core Operating Profit | $275 million | 12% (NM) | 12% | | Diluted EPS | $0.55 | 17% | 19% | - The company achieved a record first-half opening of **779 net new stores**, reaching a total of **15,423 stores** by the end of Q2 2024[1](index=1&type=chunk)[2](index=2&type=chunk) - **Same-store transactions grew by 4%** year-over-year, indicating robust customer traffic despite a decrease in average ticket size[2](index=2&type=chunk) - **Delivery sales grew 11% YoY**, contributing approximately 38% of KFC and Pizza Hut's Company sales, while digital orders accounted for about **90% of total Company sales**[3](index=3&type=chunk) [CEO Commentary](index=1&type=section&id=CEO%20Commentary) The CEO highlighted a record profitable quarter driven by value offerings, product innovation, and operational efficiencies that enhanced the company's competitive advantage - The company's strategy centered on **value-for-money and innovative new products**, which successfully drove robust same-store transaction growth[4](index=4&type=chunk) - Operational efficiency was improved by **reducing menu and operational complexity and harnessing automation and AI**, which stabilized restaurant margins[4](index=4&type=chunk) - Brand-specific initiatives were successful: **KFC expanded its price range and lowered delivery fees** to gain market share, while **Pizza Hut attracted value customers** with entry-price pizzas and the Pizza Dough Burger[4](index=4&type=chunk) - New stores continue to deliver strong returns, with a consistent payback period of **2 years for KFC** and an improved **2 to 3 years for Pizza Hut**[4](index=4&type=chunk) [Segment Performance](index=3&type=section&id=Segment%20Performance) [KFC](index=3&type=section&id=KFC) KFC's system sales grew 5% driven by new units, though same-store sales declined, and restaurant margin slightly decreased due to value offerings and wage inflation KFC Q2 2024 Performance | Metric | Q2 2024 | YoY Change | | :--- | :--- | :--- | | System Sales Growth | 5% | - | | Same-Store Sales Growth | (3%) | - | | Net New Stores | 328 | - | | Total Stores | 10,931 | +14% | | Operating Profit | $264 million | (3%) | | Core Operating Profit | $273 million | +4% | | Restaurant Margin | 16.2% | (1.1 ppts) | - Restaurant margin decreased by **60 basis points** (excluding items affecting comparability) due to increased value-for-money offerings and wage inflation, partially offset by favorable commodity prices and operational efficiency[7](index=7&type=chunk) - **Delivery sales grew 12% YoY**, contributing approximately 38% of KFC's Company sales[7](index=7&type=chunk) [Pizza Hut](index=4&type=section&id=Pizza%20Hut) Pizza Hut achieved record Q2 operating profit and improved restaurant margins through operational efficiency, despite a decline in same-store sales Pizza Hut Q2 2024 Performance | Metric | Q2 2024 | YoY Change | | :--- | :--- | :--- | | System Sales Growth | 1% | - | | Same-Store Sales Growth | (8%) | - | | Net New Stores | 79 | - | | Total Stores | 3,504 | +14% | | Operating Profit | $40 million | +13% | | Core Operating Profit | $41 million | +23% | | Restaurant Margin | 13.2% | +0.8 ppts | - Restaurant margin increased by **110 basis points** (excluding items affecting comparability) as higher operational efficiency offset the impact of increased value offerings and wage inflation[8](index=8&type=chunk) - **Delivery sales grew 6%** and contributed approximately 38% of Pizza Hut's Company sales[8](index=8&type=chunk) [Shareholder Returns & 2024 Outlook](index=4&type=section&id=Shareholder%20Returns%20%26%202024%20Outlook) [Returns to Shareholders](index=4&type=section&id=Returns%20to%20Shareholders) The company returned $249 million to shareholders in Q2 and a record $994 million in the first half of 2024 through share repurchases and dividends - The company repurchased **5.1 million shares for $187 million** in Q2 2024[9](index=9&type=chunk) - A cash dividend of **$0.16 per share** was declared, payable on September 17, 2024[9](index=9&type=chunk) - In the first half of 2024, the company returned a **record $994 million** to shareholders, exceeding the full-year 2023 returns[9](index=9&type=chunk) [2024 Outlook](index=4&type=section&id=Outlook) Yum China reaffirmed its 2024 targets, including opening 1,500-1,700 new stores and returning a record $1.5 billion to shareholders - The company's targets for fiscal year 2024 **remain unchanged**[10](index=10&type=chunk) - Key 2024 Targets: - Net new stores: **1,500 to 1,700** - Capital expenditures: **$700 million to $850 million** - Shareholder returns: A record **$1.5 billion**[10](index=10&type=chunk) [Financial Statements & Reconciliations](index=9&type=section&id=Financial%20Statements%20%26%20Reconciliations) [Condensed Consolidated Statements of Income](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) Total revenues grew 1% to $2.68 billion in Q2, with net income rising 8% to $212 million and Diluted EPS increasing 17% to $0.55 Condensed Consolidated Statements of Income (Q2 2024 vs Q2 2023) | (in US$ million) | Quarter Ended 6/30/2024 | Quarter Ended 6/30/2023 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | 2,679 | 2,654 | 1% | | Operating Profit | 266 | 257 | 4% | | Net Income – Yum China | 212 | 197 | 8% | | Diluted EPS ($) | 0.55 | 0.47 | 17% | [Condensed Consolidated Balance Sheets](index=13&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of June 30, 2024, total assets were $11.57 billion and total equity decreased to $6.47 billion, primarily due to significant share repurchases Key Balance Sheet Items (in US$ million) | Item | 6/30/2024 | 12/31/2023 | | :--- | :--- | :--- | | Cash and cash equivalents | 1,043 | 1,128 | | Total Current Assets | 3,281 | 3,431 | | Total Assets | 11,568 | 12,031 | | Total Current Liabilities | 2,678 | 2,422 | | Total Liabilities | 5,086 | 4,912 | | Total Equity | 6,469 | 7,106 | [Condensed Consolidated Statements of Cash Flows](index=15&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the first half of 2024, net cash from operations was $843 million, while financing activities used $785 million, largely for share repurchases Cash Flow Summary - Year to Date Ended 6/30 (in US$ million) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | 843 | 924 | | Net Cash Used in Investing Activities | (132) | (598) | | Net Cash Used in Financing Activities | (785) | (230) | | **Net (Decrease) Increase in Cash** | **(85)** | **59** | - The company used **$869 million for the repurchase of common stock** in the first half of 2024, a significant increase from $122 million in the same period of 2023[28](index=28&type=chunk) [Reconciliation of Non-GAAP Measures](index=18&type=section&id=Reconciliation%20of%20Reported%20GAAP%20Results%20to%20Non-GAAP%20Measures) This section details adjustments from GAAP to non-GAAP measures like Core Operating Profit to better reflect core operational performance, excluding special items and currency impacts - Non-GAAP measures are provided to facilitate comparison of past and present results by excluding items that management does not believe are indicative of core operations, such as special items, certain items affecting comparability, and foreign currency fluctuations[34](index=34&type=chunk) Reconciliation of Operating Profit to Core Operating Profit (Q2 2024, in US$ million) | Description | Amount | | :--- | :--- | | Operating profit (GAAP) | $266 | | Special Items | $0 | | Adjusted Operating Profit | $266 | | F/X impact | $9 | | **Core Operating Profit** | **$275** | - Comparability with 2023 was affected by prior-year benefits, including **temporary relief from landlords and government agencies, and VAT deductions**, which were not extended into 2024[46](index=46&type=chunk)[47](index=47&type=chunk)

Investment Rating - Buy (首次评级) [1] Core Views - 百胜中国 is the largest chain restaurant company in China with 15,022 stores as of 1Q24, operating brands like KFC, Pizza Hut, and Lavazza [1] - The company has a high and stable ROE, averaging 15.0% from 2019 to 2023, and plans to return at least $3 billion to shareholders through dividends and buybacks from 2024E to 2026E [1] - The Western fast-food industry in China is resilient, with KFC holding a 16.4% market share in 2023 and Pizza Hut leading the pizza market with a 37.4% share in 2021 [1] - 百胜中国's competitive advantages include strong brand recognition, a robust supply chain, and digital transformation, which have improved operational efficiency and customer loyalty [1] - Future growth drivers include store miniaturization, expansion into lower-tier cities, and increased profitability through optimized store models [1] Company Overview - 百胜中国 operates six brands, including KFC, Pizza Hut, and Lavazza, with a total of 15,022 stores as of 1Q24 [1] - KFC and Pizza Hut are the main revenue contributors, accounting for 75% and 21% of total revenue in 2023, respectively [1] - The company has a strong digital presence, with 89% of sales coming from digital orders as of 1Q24 [1] - 百胜中国 has a well-established supply chain, with 33 logistics centers and strategic investments in key suppliers like Sunner Development [1] Industry Analysis - The Western fast-food market in China reached RMB 368.8 billion in 2023, accounting for 7.0% of the total餐饮 market, up 1.7 percentage points from 2016 [1] - The industry has a high连锁化率 due to fewer SKUs, less regional taste variation, and mature supply chains [1] - KFC leads the Western fast-food market with a 16.4% market share in 2023, while Pizza Hut dominates the pizza market with a 37.4% share in 2021 [1] Competitive Advantages - **Brand Strength**: KFC and Pizza Hut have been in China for over 30 years, with 440 million and 150 million members, respectively, as of 2023 [1] - **Product Innovation**: The company launches over 500 new products annually and has a "Billion Dollar Club" for high-performing products [1] - **Supply Chain**: 百胜中国 has a fully integrated supply chain, from采购 to餐厅, with 33 logistics centers and strategic investments in key suppliers [1] - **Digital Transformation**: The company has a strong digital ecosystem, with 89% of sales来自 digital orders as of 1Q24, and has significantly reduced labor costs through数字化 [1] Future Growth Drivers - **Store Miniaturization**: KFC and Pizza Hut have introduced smaller store formats, reducing initial investment by RMB 300,000 and RMB 400,000, respectively, and improving cash利润率 by 2-3 percentage points [1] - **Expansion**: The company plans to increase store density in higher-tier cities and expand into lower-tier markets, with potential for KFC and Pizza Hut to grow their store counts by 74.0% and 82.5%, respectively, by 2026 [1] - **Profitability Improvement**: With the increasing proportion of smaller, more profitable stores, the company expects further improvements in store-level profitability [1] Financial Projections - 百胜中国 is expected to achieve net profits of $850 million, $940 million, and $1.03 billion from 2024E to 2026E, with a CAGR of 10.3% [1] - The company's PE ratio is projected to be 12.9X, 11.0X, and 9.5X for 2024E, 2025E, and 2026E, respectively [1] - Based on a 50% weighting of PE and DCF valuation methods, the target price is set at HK$352.75, leading to a "Buy" rating [1]

The upcoming report from Yum China Holdings (YUMC) is expected to reveal quarterly earnings of $0.47 per share, indicating no change from the year-ago quarter compared to the year-ago period. Analysts forecast revenues of $2.77 billion, representing an increase of 4.4% year over year.The current level reflects no revision in the consensus EPS estimate for the quarter over the past 30 days. This demonstrates how the analysts covering the stock have collectively reappraised their initial projections over this ...