YUMC reported 4.4% YoY total revenue growth in 3Q25 with 0.4ppt YoY OPM expansion. Such solid quarterly results continued to outperform other restaurant & catering peers. Looking ahead into 4Q, management expects continuous sales momentum – potential acceleration of store opening & market penetration could be a positive catalyst in 2H25-26. Current valuation seems undemanding, and its attractive shareholder return can provide investors with a good safety margin. Maintain BUY.
Key Factors for Rating
3Q results review. YUMC’s total revenue increased 4.4% YoY to US$3,206m in 3Q25, basically in line with expectations. System sales (ex FX) was up 4.0% YoY – same-store sales went up 1.0% YoY (a resilient trend from 2Q25), whilst store opening pace accelerated – with 402/154 net additions of KFC/PH in 3Q25 (vs. 2Q25’s 295/99 and 3Q24’s 352/102). Remarkably, 41%/27% of net new KFC/PH stores in 9M25 was in franchise store format, and YUMC has been strategically leveraging its franchisees to penetrate more locations. Channel wise, delivery sales contribution went up 8ppts/6ppts YoY for KFC/PH amid China’s food delivery war. Restaurant margin slightly increased 0.2ppt YoY to 17.3% (in-line), with cost ratio of food and paper, payroll and occupancy at 31.3% (-0.4ppt YoY), 26.2% (+1.1ppt YoY) and 25.2% (-0.9ppts YoY), respectively, and G&A expenses ratio was flat YoY at 4.5%, reflecting disciplined cost control. Accordingly, OPM rose 0.4ppt YoY to 12.5%. Investment loss narrowed to US$10m in 3Q25 (3Q24: a gain of US$34m). Reported shareholders’ profit was down 5% YoY to US$282m, in line.
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 subsidy activities normalise in 2026. Management reaffirms its targeted capital return to shareholders at US$3.0bn for 2025-26 in total, equiv. to an avg. annual capital return of 8%-9%. Avg. annual capex guidance remains at US$600-700m a the long-term perspective.
Key Risks for Rating
Risk factors: 1) SSSG softness, 2) slower-than-expected store network expansion, 3) cost inflation, 4) unsuccessful execution of the new initiatives (e.g. PH WOW, K Coffee, KPRO, etc.), and 5) FX rate fluctuations.
Valuation
We raised our topline forecasts for 2025-27 by 0.3%-0.8% due to acceleratedstore opening, esp. in franchise store format. We also slightly revised up our OPMforecasts, primarily on ongoing cost tailwinds, tenant-favourable leases, and inhouseefficiency gain. EPS is expected to grow at 10% CAGR (unchanged) from2024 to 2027, considering an average annualised decline of c.3% in the numberof shares outstanding.
Maintain BUY rating and our TP are HK$428.00 (US$54.90) for YUMC-H (YUMCUS),representing 21.8x/19.2x 25-26E P/E.