Yum China Holdings Inc. (YUMC) is the largest restaurant and fast-food chain company in China. The company runs over 8,700 restaurants in more than 1,300 cities. Yum China possesses, as an independent entity, a 50-year renewable master license from U.S.-based multinational YUM! BRANDS for KFC, Pizza Hut, and [mepr-active membership=”1734″ ifallowed=”show” unauth=”message” unauth_message=”Please login or purchase a membership to view full text.”]Taco Bell in China excluding Hong Kong. It owns or franchises also brands and concepts such as East Dawning, Little Sheep, and COFFii & JOY, a new coffee concept started in China in 2018. Yum China is on Forbes’ Global 2000 list.
Yum China’s KFC business operates over 6,100 restaurants across the country and contributes to 69 percent to the total revenue. The segment grew by 5 percent over the first six months of 2019 and is also Yum China’s most profitable business at the moment, with 97 percent profit contribution. Pizza Hut operates over 2,200 restaurants in China and accounts for 24 percent of the revenues. However, the segment shrank by 4 percent over the first half-year 2019. All other brands combined grew by 56 percent over that period, but accounted for just one percent of the total revenue and remained in deficit so far.
Yum China was incorporated in 2016 as a spin-off from US Yum! Brands and is headquartered in Shanghai, China. The company is listed on New York’s Stock Exchange since November 2016. Its shares can also be traded in Germany, UK, and Mexico. Major shareholder is BlackRock with an ownership of around 9 percent, followed by Primavera Capital Management with an ownership of about 8 percent. Director’s ownership is less than a half percent. 96 percent of the shares are in public hand.
With a workforce of over 450 thousand employees, Yum China reported revenues of 4.4bn USD and profits before tax of 553m USD over the first half-year of 2019. Revenue increased by 3 percent, while profits declined by 9 percent compared to the same period a year ago. Profits declined mainly due to foreign exchange effects and higher prices for chicken. For the full year 2018, revenues and profits increased by 8 and 18 percent respectively. The operating margin reaches roughly 11 percent, which is around industry average. Yum China’s cash reserves increased by 2 percent over the first half-year 2019 to 1.3bn USD, while debts and lease obligation increased by almost 90 times to 2.2bn USD over that period.
Yum China shows a stable balance sheet with acceptable profitability and financial strength. The equity ratio is at 46 percent and the gearing, defined here as total liabilities to total equity, at 118 percent. Moody’s daily credit risk score for Yum China is 7, indicating higher risks, based on the day-to-day movements in market value compared to the company’s liability structure. Next earning results will be announced at the end of October.
Yum China’s shares are in an uptrend since October 2018 and gained more than 40 percent in value since, more than 30 percent alone this year. The company is currently priced at 25 times earnings, six times book value, and at 15 times operating cash flow. The dividend yields roughly above one percent. 10 out of 13 analysts have a ‘buy’ or ‘outperform’ recommendation on the stock.
Our conclusion: Yum China shows a healthy balance sheet with acceptable profitability and financial strength. However, the valuation is high and comes with a compounded annual growth rate for revenue and profits of only 7 and 11 percent respectively over the last three years.
The outlook for the restaurant industry in the world’s most populous country is positive and is expected to grow by 8 percent a year through 2023. China’s fast-food industry is poised for growth due to increasing numbers of small-size households, rising urbanization, and higher disposable incomes.
Yum China is well-positioned in an intensely competitive environment. The company’s large size will benefit from further economies of scale and the advantage of flexible pricing. Yum China plans to open another 400 new locations over the second half of this year and expects to reach 10 thousand stores by 2021. Under stable economic conditions, we expect the share price to continue riding its trend with another 10 to 15 percent gains over the next twelve months. However, due to the high valuation of the company downside risks are inherent.
AIS Rating: ★★★☆☆
| 2015 | 2016 | 2017 | 2018 | 2019 H1 only |
|
|---|---|---|---|---|---|
| EPS (USD) | 0.9 | 1.4 | 1.0 | 1.8 | 1.0 |
| Change (%) | 4,550 | 52 | (26) | 79 | (5) |
| DPS (USD) | n/a | 0.1 | 0.4 |
| P/E | P/E INDUSTRY |
P/B | P/CF | Equity Ratio* |
ROE | LIAB./ Equity** |
Div YLD |
|---|---|---|---|---|---|---|---|
| 25 | 19 | 5.6 | 15 | 46% | 23% | 118% | 1.1% |
* Equity / Total Assets, ** Total Liabilities / Equity
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