YUMC reported 4.1% YoY total revenue growth in 4Q24 with 1.4ppts YoY OPM expansion. Such robust quarterly results continued to outperform its rivals despite challenging market conditions, mainly attributable to its evolving business model with excellent execution. Besides further valuation upside potential for chain restaurant leaders in China, YUMC’s shareholder returns still provide investors with safety margin. Maintain BUY.
Key Factors for Rating
In 2024, YUMC’s total revenue increased 3.0% YoY to US$11,303m (0.8% higher than our estimate); shareholders’ profit increased 10.2% YoY to US$911m (0.3% higher than our estimate). 4Q24 results review. System sales (ex FX) was up 4% YoY, on the back of accelerated openings and traffic, despite 1% YoY SSS decrease, as a whole. Its company restaurant margin improved 1.6ppts YoY to 12.4% in 4Q24; costs of food and paper, payroll, and occupancy were 31.9% (-0.5ppt YoY), 28.1% (-0.8ppt YoY), and 27.6% (-0.3ppt YoY). G&A expenses ratio dropped 0.1ppt YoY to 6.0%; accordingly, OPM rose 1.4ppts YoY to 5.8%. Net profit increased 18.6% YoY to US$115m.
KFC. In 4Q24, KFC reported 5% YoY system sales growth - SSS decreased 1% YoY (ex FX; stemming from 3% YoY same-store transactions increase, offset by 4% YoY average ticket decrease); KFC store count rose 13% YoY to 11,648 as of 31 Dec. 2024, with 365 net additions (3Q24: 352). In 4Q24, the average ticket was resilient at RMB38; from Dec. 2024, KFC adopted 2%-3% price hike, leaving more room for promotions. Looking ahead into 1Q25, the management expects KFC to sustain SSS growth momentum. KFC member count was up to 490m, representing 66% of its system sales in 4Q24. Digital order contribution modestly rose to 91%. KFC company restaurant margin increased 1.3ppts YoY to 13.3% on cost tailwinds; operating profit grew 6.4% YoY to US$192m in 4Q24.
Pizza Hut. In 4Q24, PH reported 3% YoY system sales growth - SSS decreased 2% YoY (ex FX; stemming from 9% YoY same-store transactions increase, offset by 10% YoY average ticket drop); PH store count rose 12% YoY to 3,724 as of 31 Dec. 2024, with 118 net additions (3Q24: 102). Management expects PH to continue to see lowering ticket size. For example, from Dec. 2024, PH’s new menu placed more emphasis on value-for-money options, to increase its presence esp. in the growing mass market. In 4Q24, PH member count was 180m, representing 58% of its system sales, while digital order contribution was 93% in 4Q24. PH company restaurant margin improved 2.0ppts YoY to 9.6%; operating profit rose to US$14m in 4Q24 from US$5m in 4Q23.
New business initiatives. Each of the two initiatives is in a unique position to underpin market acceptance, in our view. 1) Side-by-side K Coffee store count reached 700 by Dec., ahead of the previous guidance. We like K Coffee’s distinct menu with the “coffee & hot dog combo” at RMB9.9 and other value-for-money innovative SKUs. Rising brand awareness (with ongoing end-market education) is key to sales growth in the longer term, esp. given that the addressable market is actually huge. Another factor is that K Coffee can work in synergy with existing KFC locations, not only driving customer traffic but minimising cost of operation. 2) PH WOW. As a breakthrough, the WOW model is now becoming more mature, with store count of over 200 by Dec., accelerating from Nov. Going forward, the management will focus on a) market penetration, with more new stores in lower- tier cities and core CBDs, and b) improvement of delivery services, from a cost- benefit perspective.
Guidance. Store expansion target remains solid at 1,600-1,800 net new stores in 2025 (2024: 1,751), with agile business model and healthy payback. In 2025- 26, in terms of new openings, the proportion of its franchise restaurants should substantially increase to over 35%, as strategic opportunities (e.g. in lower-tier cities and towns, specialty channels, etc.) are visible. CAPEX should be around US$700-800m for 2025 (2024: US$705m). Cost of food & paper and cost of payroll & employee benefits could be marginally more favourable in general, but subject to macro conditions. We forecast the company (system) restaurant profit margin to rise to 16.5%-17.0% in 2025-27, and operating efficiency optimisation on the corporate (operator) level could be recurring. Remarkably, YUMC’s management reiterates that planned capital return to shareholders will be US$3bn during 2025- 26, without increase in borrowings. Currently, the implied 2025E total shareholder return equals to c.8%.
Key Risks for Rating
Risks: 1) SSSG softness; 2) intensified competition; 3) commodity cost inflation; 4) slower-than-expected pace of store expansion; 5) unsuccessful execution of new initiatives; and 6) forex rate fluctuations.
Valuation
We have fine-tuned our revenue and profitability forecasts for 2025-26E. EPS is likely to increase at a low-teen% CAGR from 2024 to 2027, regarding the impact of repurchases on the number of shares outstanding. We continue to list YUMC as our top pick for the Consumer Services (Restaurant & Catering) sector. Based upon 22.0x 25E P/E (previous: 21.0x 25E P/E), we derive our TP for YUMC-H and YUMC-US at HK$441.00 and US$56.50, respectively, both with BUY rating.