Outlook. YUMC's long-term business strategy seems consistent. Business model is agile, and feedbacks on its new initiatives look encouraging. We like its strategic cooperation with franchisees, which will not only generate more sales but improve FCF margin. Despite soft consumption sentiment, as well as intense competition, SSSG has been steady, but could still fluctuate due to fluid macro environment. Both KFC and PH are likely to be less impacted (compared with other restaurant players) if delivery subsid ...

Financial Data and Key Metrics Changes - The company achieved record highs in revenue, operating profit, and operating profit margin for Q2 2025, with operating profit growing 14% to $304 million [10][31] - Same store sales growth turned positive at 1%, with system sales growth reaching 4%, showing a sequential improvement of two percentage points [9][28] - Restaurant margin improved by 60 basis points, and operating profit margin increased by 100 basis points year over year [10][31] Business Line Data and Key Metrics Changes - KFC achieved 5% system sales growth and a healthy restaurant margin, operating over 12,000 stores in more than 2,400 cities [10][11] - Pizza Hut sustained 2% same store sales growth, with a 17% increase in same store transactions, and improved margins through operational efficiency [11][24] - K Coffee Cafe contributed to incremental sales, with average cups sold increasing and a total of 1,300 locations nationwide [22][12] Market Data and Key Metrics Changes - Delivery sales accounted for around 45% of total sales mix, up from 38% in the previous year, driven by promotions and own channels [16][18] - The company opened 336 net new stores in Q2, with a total of 12,238 KFC stores and 3,864 Pizza Hut stores [21][26] - The franchise store mix for new openings was 41% for KFC and 26% for Pizza Hut, ahead of schedule [37] Company Strategy and Development Direction - The company is focused on operational efficiency and innovation, with initiatives like K Coffee Cafe and the Pizza Hut Wow model aimed at expanding market reach [47][68] - The company plans to achieve 1,600 to 1,800 net new store openings in 2025, with a solid pipeline for growth [37][36] - The company is committed to returning $3 billion to shareholders from 2025 through 2026, maintaining a healthy cash position of $2.8 billion [35][34] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving full-year targets for 2025 despite complex market conditions, with a focus on maintaining margins and protecting price integrity [36][47] - The company anticipates steady same store sales levels year over year in the second half, while facing challenges from delivery platform competition [38][56] - Management highlighted the importance of balancing sales growth with margin protection, learning from past experiences in competitive environments [120][121] Other Important Information - The company is raising its 2025 target for K Coffee Cafe locations from 1,500 to 1,700 due to strong performance [22] - The company is committed to digitization initiatives, including AI, to drive growth and efficiency [44][45] - The average annual capital return is around 8% to 9% of market cap, with flexibility regarding the split of capital returns between years [35] Q&A Session Summary Question: Insights on delivery business growth and margin impact - Management acknowledged intense competition in the delivery space but emphasized a balanced approach to drive top-line growth while protecting margins [53][55] Question: New format store opening targets and profitability - Management confirmed over 20 Wow stores opened, with encouraging sales and margin levels, but did not provide specific opening targets for the new model [66][71] Question: Potential ultimate goals for Pizza Hut's margins - Management indicated that mid to long-term improvements in Pizza Hut's margins are expected, with potential to reach levels closer to KFC [80][82] Question: Impact of delivery platform subsidies on margins - Management noted that larger brands like Yum China enjoy favorable subsidy arrangements, minimizing the impact on margins [87][89] Question: Changes in average check trends at KFC - Management explained that the average check at KFC was positively impacted by a higher delivery mix, but a downward trend is expected in the second half due to smaller orders [95][96] Question: CapEx guidance and future trends - Management lowered CapEx guidance due to reduced CapEx per store, indicating a stable trend for future years [100][105] Question: Franchise store opening decisions - Management clarified that franchise stores are incremental and strategically opened in lower-tier cities and high-traffic locations [110][111] Question: Competitive environment and margin preservation - Management reiterated the importance of maintaining price integrity and not sacrificing margins for sales growth amid competitive pressures [120][121]

Financial Data and Key Metrics Changes - In Q1 2025, the company achieved record highs in revenue, net income, and diluted EPS, with diluted EPS increasing by 10% year over year [6][25] - Same store sales index reached 100% of the prior year level for the first time since Q1 2024, with same store transactions growing for nine consecutive quarters [7][12] - Operating profit grew by 8% year over year, and restaurant margin expanded by 100 basis points [7][25] Business Line Data and Key Metrics Changes - KFC system sales grew by 3% year over year, with a restaurant margin of 19.8% and same store sales index at 100% of the prior year level [10][12] - Pizza Hut's system sales increased by 2% year over year, with same store sales index nearly at 100% and a significant 17% growth in same store transactions [15][16] - KFC opened 295 net new stores, bringing the total to 11,943, while Pizza Hut expanded to 3,769 stores with a net addition of 45 stores [11][18] Market Data and Key Metrics Changes - The company noted a complex and evolving market environment, with consumer spending remaining rational [28] - The delivery business for KFC grew by 13%, while Pizza Hut also achieved a 13% growth in delivery [76] - The company is strategically expanding into lower-tier cities with smaller store formats, which contributed to a 4% revenue growth from new units [21][89] Company Strategy and Development Direction - The company is focused on operational efficiency and innovation, with initiatives like Project Fresh Eye and Project Red Eye aimed at streamlining operations and enhancing customer experience [41][42] - KFC's K Coffee Cafe is expanding rapidly, with plans to reach 1,500 locations by the end of 2025, leveraging existing customer bases [38][100] - Pizza Hut is adopting a simpler and more efficient model to appeal to younger consumers and solo diners, with a focus on expanding its addressable market [40][41] Management's Comments on Operating Environment and Future Outlook - Management remains cautious about potential fluctuations in same store sales index but is optimistic about achieving ten consecutive quarters of positive same store transaction growth [29][62] - The company expects mid-single-digit system sales growth for the full year and plans to open 1,600 to 1,800 net new stores [29][88] - Management highlighted the importance of maintaining strong customer connections and adapting to changing consumer preferences [52][76] Other Important Information - The company plans to return $3 billion to shareholders from 2025 to 2026, in addition to $1.5 billion returned in 2024 [27] - The effective tax rate for the quarter was 27.8%, and net income was $292 million, growing 3% year over year [25][26] - The company is exploring optimization opportunities to offset cost increases in various areas, including occupancy and labor costs [34][66] Q&A Session Summary Question: Impact of competition and demand trends post-Q1 - Management noted that April performance was in line with expectations, with no significant negative impact observed so far, but they remain watchful of market conditions [50][51] Question: Pizza Hut's same store sales trajectory - Management indicated that while the market environment is evolving, they expect to maintain steady margins and reaffirmed guidance for mid-single-digit system sales growth [60][64] Question: Consumer environment in China and transaction growth at KFC - Management reported solid transaction growth at KFC and noted an increase in market share, particularly in the delivery business [74][76] Question: New store expansion and revenue growth - Management explained that while new store growth contributes to revenue, the smaller store format may lead to lower revenue per store initially, but payback periods remain healthy [86][90] Question: Long-term view on K Coffee - Management expressed commitment to the K Coffee business, highlighting its potential for top-line growth and profitability through shared resources [99][100] Question: Brand marketing strategies - Management emphasized the importance of staying relevant to consumer preferences and introduced new concepts like K PRO to cater to health-conscious consumers [106][108]

Financial Data and Key Metrics Changes - In Q1 2025, the company achieved record highs in revenue, net income, and diluted EPS, with diluted EPS increasing by 10% year over year [6][26] - Same store sales index reached 100% of the prior year level for the first time since Q1 2024, with same store transactions growing for nine consecutive quarters [7][12] - Operating profit grew by 8% year over year, and restaurant margin expanded by 100 basis points [7][26] Business Line Data and Key Metrics Changes - KFC system sales grew by 3% year over year, with restaurant margin expanding to 19.8% [9][13] - Pizza Hut system sales increased by 2% year over year, with same store sales index nearly reaching 100% of the prior year level and same store transactions growing by 17% [15][16] - KFC opened 295 net new stores, bringing the total to 11,943, while Pizza Hut expanded to 3,769 stores with a net addition of 45 stores [11][18] Market Data and Key Metrics Changes - The company noted a complex and evolving consumer environment, with rational spending patterns observed among consumers [29][50] - Delivery business for KFC grew by 13%, while Pizza Hut also achieved a 13% increase in delivery sales [72] Company Strategy and Development Direction - The company is focused on operational efficiency and innovation, with initiatives like Project Fresh Eye and Project Red Eye aimed at streamlining operations and enhancing customer experience [41][42] - KFC is expanding its K Coffee business, targeting 1,500 locations by the end of 2025, while Pizza Hut is introducing new store models to capture additional market share [38][40] - The company aims to maintain or slightly improve core operating profit margins for the full year [31][60] Management's Comments on Operating Environment and Future Outlook - Management remains cautious about potential fluctuations in same store sales index but reiterates guidance for mid-single digit system sales growth for 2025 [30][60] - The company is adapting to competitive pressures, particularly from delivery aggregators, while maintaining strong control over its business [52][53] Other Important Information - The company plans to return $3 billion to shareholders from 2025 to 2026, in addition to $1.5 billion returned in 2024 [28] - The effective tax rate for the quarter was 27.8%, which is 90 basis points higher year over year [26] Q&A Session Summary Question: Impact of competition and demand trends post-Q1 - Management noted that April performance was in line with expectations, with no significant negative impact observed so far, but they remain watchful of market conditions [49][50] Question: Same store sales trajectory for Pizza Hut - Management indicated that while they strive for ten consecutive quarters of positive transaction growth, they remain cautious about potential fluctuations in same store sales index [58][60] Question: Consumer environment in China and transaction growth at KFC - Management reported solid transaction growth at KFC, with a 4% increase in Q1, and noted that they are capturing market share, particularly in the delivery business [70][73] Question: New store expansion and revenue growth - Management confirmed that while new store growth is contributing to revenue, the mix shift towards smaller stores may limit revenue growth from new stores in the near term [81][84] Question: Long-term view on K Coffee - Management expressed commitment to the K Coffee business, highlighting its potential for top line growth and profitability due to shared resources with KFC [93][96] Question: Brand marketing strategies - Management emphasized their focus on staying relevant to consumer preferences and introducing healthier options through new concepts like K PRO [100][102]