EUR 850.00 For Business Accounts Only

Morningstar | Yum China's Menu and Promotional Strategies Positioned for Uneven China Consumer Environment

Yum China was spun off into an independent, publicly traded company in October 2016, but remains a trademark licensee of Yum Brands. Although sales trends have been uneven at times amid macroeconomic uncertainty, a changing competitive set and increased promotional activity from rivals, evolving consumer views regarding health and wellness, and executional missteps, we still view Yum China as a wide-moat business thanks to a powerful brand intangible asset, advanced distribution infrastructure, and local site development teams. We find management's longer-term goals of high-single-digit system sales growth, 17% restaurant margins (after the 3% of systemwide sales licensing fee paid to Yum Brands), and low- to midteens EPS growth realistic given favorable China consumer demographic trends and the operating leverage inherent in its business model.We view Yum China as one of the most direct ways for investors to participate in the increased spending power of Chinese consumers and identify significant opportunities for market share and unit expansion in the fragmented, $675 billion Chinese restaurant market. In China, chains account for just 10% of restaurant locations compared with 55% in the U.S. and almost 30% across the globe, based on estimates derived from Euromonitor data. We're also optimistic about Yum China's various top-line drivers, including value platforms, menu simplification, alternative restaurant formats such as kiosks, enhanced digital marketing efforts (underscored by 160 million and 50 million loyalty program members at KFC and Pizza Hut, respectively, giving the company one of the largest consumer loyalty programs in the world), unrivaled delivery capabilities (representing 18% of sales at company-owned locations), and nascent brand expansion potential in Taco Bell, Little Sheep, and COFFii & Joy. In our view, future comp stabilization--which we expect to be the key driver behind stock performance--and meaningful cash returned to shareholders through share repurchases and a quarterly dividend of $0.12 per share (backed by $1.4 billion in cash and equivalents on the balance sheet as of June) offer dual catalysts for long-term shareholders.