YUMC reported 0.8% YoY total revenue growth in 1Q25 with 0.8ppt YoY OPM expansion. YUMC’s share price plunged post the result, reflecting investor concerns about slower-than-expected net store openings and management’s relatively conservative views towards overall consumer demand and YUMC’s margin improvement potential. However, we still like its resiliency across cycles and its business moat remains intact. Current valuation looks attractive and its shareholder return as a whole can offer a good safety margin. Maintain BUY rating.
　　Key Factors for Rating
　　1Q25 results review. YUMC’s total revenue grew 0.8% YoY to US$2,981m in 1Q25, slightly missing expectations. System sales (ex FX) grew 2% YoY - same- store sales was flat YoY (after four consecutive quarters of decrease), while store opening was slower than expectations in 1Q25. Company restaurant margin was up 1.0ppt YoY to 18.6% in 1Q25 (a positive surprise), with cost ratio of food and paper, payroll and occupancy at 31.2% (-0.9ppt YoY), 25.7% (+0.4ppt YoY) and 24.6% (-0.3ppt YoY), respectively. G&A expenses ratio slightly improved 0.1ppt YoY to 4.6%; OPM rose 0.8ppt YoY to 13.4%. Overall, shareholders’ profit grew 1.7% YoY to US$292m, basically in line.
　　KFC. In 1Q25, KFC saw 3% YoY system sales growth - SSS was flat YoY (ex FX; 4% same-store transactions YoY increase was offset by 4% average ticket YoY decrease); KFC store count rose 13% YoY to 11,943 as of 31 March 2025, with 295 net additions (4Q24: 365). In 1Q25, the average ticket was RMB40 (1Q24: RMB42), which in our view, could stay modestly lower in the coming quarters on soft on-premise consumption sentiment and KFC’s strategy consistently shifting towards value-for-money proposition. KFC member count was up to 505m, representing 67% of its system sales. Digital order contribution reached 92%. KFC’s company restaurant margin rose 0.6ppt YoY to 19.8% (viewed as ideal by management). Operating profit was up 3.8% YoY to US$386m in 1Q25.
　　PH. In 1Q25, PH saw 2% YoY system sales growth - SSS was flat YoY (ex FX; 17% same-store transactions YoY increase was partially offset by 14% average ticket YoY decline); PH store count rose 10% YoY to 3,769 as of 31 March 2025, with 45 net additions (4Q24:118). PH would continue to expand penetration with decreasing average ticket, in coherence with its tilt toward the mass market and more lower-tier cities. PH member count was up to 190m, representing 61% of its system sales. Digital order contribution reached 95% in 1Q25. PH’s company restaurant margin increased 2.0ppts YoY to 14.4%; operating profit grew from US$47m in 1Q24 to US$60m in 1Q25.
　　YUMC’s SSSG performance has been well on track from April 2025 (compared to the full-year goal) but may still be volatile from time to time (e.g. a high base in June).
　　Guidance. In general, long-term business strategy and full-year guidance (w.r.t. store expansion, system sales growth, profitability, capital return to shareholders, etc.) are consistent. The number of net new stores would be 1,600-1,800 in 2025, implying a QoQ acceleration for next quarters. Notably, there would be 1,500 K Coffee side-by-side stores (previous plan: 1,300) by 2025. SSSG may fluctuate due to fluid macro environment (esp. rational consumer spending), according to management. As a whole, YUMC’s system sales YoY growth would be within 4%-6% for 2025. OPM is likely to be stable or slightly higher, based on the following assumptions: 1) cost ratio of food & paper will be c.31%-32% for KFC and c.32%-33% for PH, 2) inflated rider cost ratio (on delivery mix impact, despite the downward trend of per order cost) and stable non-rider cost ratio (wage inflation can be offset by efficiency gain), and 3) optimisation of cost ratio of occupancy potentially on tenant-favourable leases. Management reaffirms its targeted capital return to shareholders of US$3bn for 2025 and 2026 in total.
　　New business initiatives. 1) K Coffee. Cup volume and sales value saw 20% YoY growth in 1Q25. K Coffee saw accelerated product innovation, with over 50 new SKUs launched in 1Q25, such as beverages ranging from coffee to tea (e.g. Matcha, Longjin) and pastries (e.g. egg tarts), aiming to seize incremental market opportunities. Side-by-side K Coffee can continue to work in synergy with existing KFC locations. 2) PH WOW. According to management, capex of each PH WOW is around RMB0.65m, as low as half of a regular PH store. Such an agile model is in particular poised for expansion in lower-tier cities. 3) KPRO. SKUs in KPRO are complementary to those in KFC, and initial customer feedback seems positive. Currently, there are around 10 stores in tier-1 cities. KPRO is more likely to adopt the “side-by-side” model similar to that of K Coffee, at this stage. 4) Pizzeria. As a pilot format, Pizzeria is strategically for brand elevation and product incubation, with around 10 stores in operation and average ticket of RMB80-90.
　　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 reduced our top-line forecasts for 2025-27 by 1%/2%/5%, mainly factoring in deceleration in store additions. We reduced our OPM forecasts, assuming that commodity tailwind will be narrower (note: tariff impacts could be limited as over 90% of raw materials are locally sourced, according to management) for YUMC. As a result, we cut our shareholders’ profit forecasts for 2025-27 by 4-7%. EPS is likely to grow at a 3-year CAGR of nearly 10% from 2024 to 2027.
　　We continue to list YUMC as our top pick for the Consumer Services (Restaurant & Catering) sector. Currently, YUMC’s post-earnings share price pullback provides an attractive buying opportunity - P/E valuation looks undemanding and the total shareholder return yield equals to c.9%. Based on an unchanged 22.0x 25E P/E, we derive our TP for YUMC-H and YUMC-US at HK$428.00 and US$55.00, both with BUY rating.