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].
百胜中国：The best-in-class costs management in 2Q24