4Q24 results were largely inline with CMBI/ BBG est., but recent trends are very constructive (positive SSSG during CNY, no negative impact on traffic post price hikes for KFC, and decent traffic after launch of new menu, with amazing value in Pizza Hut). Plus the decent cash returns, we maintain BUY and raise TP.
　　Management has shared the guidance for FY25E, namely: 1) MSDsystem sales growth, 2) LSD commodity price deflation, 3) LSD to MSD wage inflation (including the higher rider costs and delivery fees), and 4) flattish or slight improvement in Core OP margin.
　　And we think the trend is constructive, supported by various growthdrivers. Since management is targeting a faster system sales growth in FY25E (at MSD vs just 4% in FY24) and slightly slower store expansion plan (at 11% implied vs 12% in FY24), to achieve that, we do think a positive SSSG in FY25E is likely needed (inline with the estimates in our model). For KFC, we think the growth drivers are: 1) ramp up of K-Coffee (number of stores will reach 1300 by FY25E and may create a single-digit boost to overall sales), 2) ASP hikes since Dec 2024 (first time in almost 2 years and no negative impact on traffic so far), 3) delivery sales growth could still be fast (reduced delivery fees and an increased number of small-size orders), 4) product innovations (e.g., introducing the spicy original recipe chicken), and 5) more effective marketing (keeping the same amount of advertising budget but spending that in a more innovative way to boost the ROI, possibly with the help of AI). For Pizza Hut, the growth drivers are: 1) further ramp up of the Pizza Hut WOW stores (highly value-for-money products plus busy traffic locations are very effective), which is able to capture more types of consumer groups like students, families or other more price- sensitive customers, 2) introduction of the fairly aggressive new menu (40 delicious new and value-for-money products with solid profit margin), which may bring in a massive amount of traffic (this strategy should be proven, as sales of Pizza priced under RMB 50 increased by 50% YoY in FY24), and 3) product category expansion (e.g. products like the Pizza Burger). Margin wise, we are also positive, because we can still see room for improvement in GP margin (aided by raw material price deflation and the Project Redeye) and OP margin (supported by different ways like simplification, automation, centralization and digitalization to further boost efficiency).
　　Maintain BUY and raise TP to HK$ 484.83. The new TP is based on 22xFY25E P/E (unchanged), still below 5-year average P/E of 25x. We fine- tune the FY25E/ 26E net profit forecasts by -1%/ +2% to reflect weaker sales per store but a better operating leverage. The stock is now trading at 17x FY25E P/E, not only undemanding, but also rather attractive, given the very generous cash return programme.
　　Performance during the CNY is positive but we should stay prudent.
　　Management did mention a positive SSSG during this 2025 CNY holidays, driven by excellent food offerings with incredible value and marketing campaigns featuring Olympic Champion and popular IPs, and we are impressed given the weak SSS recovery rate in 4Q24. However, we remain prudent, because the macro environment is still uncertain and consumers may still be very cost-cautious and reluctant to spend much post holidays, and this pattern has happened very often in the past 2 years.
　　Store opening in FY24 was ahead of schedule and pace in FY25E may still befast. Yum China has opened 1,751 net new stores in FY24, beating its guidance of 1,500 to 1,700. Franchised stores were at about 30%/ 10% of the total for KFC/ Pizza Hut. The growth rate actually slowed down to 12% vs 13% in FY23, and this was due to the increased number of closures. However, we still see this as a positive, because it was a strategic move by management, where many old stores can be moved to a better location with an even lower rent. The Company now targets to open 1,600 to 1,800 net new stores in FY25E, with a capex of about RMB 700mn to RMB800mn. The portion of franchised stores among the new stores will also increase to 40%+/ 20%+ for KFC/ Pizza Hut.
　　4Q24 results inline while the underlying is encouraging. In FY24, Yum China’ssales and net profit increased by 4% and 10%, both inline with CMBI/ BBG est. In 4Q24, Yum China’s sales and net profit growth was at 4% and 19%, also roughly inline with CMBI/ BBG est.. Growth was mostly driven by delivery (+14%) vs dine-in or takeaways (-2%). And the margin expansion was due to GP margin improvements (e.g. softer raw material prices) and efficiency gains (from all aspects like staff costs, rental, A&P and D&A). On top of that, SSSG only dropped by 1% in 4Q24, improving from a 3% decline in 3Q24, which was mostly boosted by the traffic increases (+3%/ +12% for KFC/ Pizza Hut), partly at the expense of cuts in ASP (-4%/ -10% for KFC/ Pizza Hut). We are also delighted to see further improvements in restaurant-level OP margin, which expanded by 1.3ppt/ 2.0ppt YoY to 13.3%/ 9.3% for KFC/ Pizza Hut in 4Q24.