Saturday, February 15, 2020

Yum China (KFC & Pizza Hut China) - A Great Stock that You Can't Ignore.



Yum China is the biggest fast-food chain in China.
They established the first store in 1987 in Beijing, and never looks back ever since.

Yum China stock spin-off from Yum! Brands in Oct 2016.
Growing an exceptional rate, the share price has also soared since Oct 2016.

The share price has grown by about 75% since Oct 2019 to 14 Feb 2020.


Check out the share price of Yum China below:




It owns 6 powerful brands of the following:


  1. KFC
  2. Taco Bell
  3. Pizza Hut
  4. Little Sheep
  5. East Dawning
  6. Coffii & Joy


KFC is bigger than Mcdonald in China.

Because KFC China is creatively changing its menu to cater to the local China market, the sales are doing well and captured a lot of fans too.



How Is KFC China Doing in China

We may not be aware, KFC has a lot of KFC stores in China.
And Yum China is not slowing down in opening up more stores.

This is because Chinese in China really loves the fried chicken by KFC China:




Q4 2019 Quarterly Earnings Report

Recently on 6 Feb 2020, Yum China shared the latest 4th quarterly report of 2019.

Yum China Q4 earnings: $0.25 EPS vs. $0.19 estimated

The performance is stellar.

However, due to the recent Coronavirus outbreak, it may potentially impact the sales for 2020.



Yum China by the Number - A Powerful Brand:


  • 9200 stores in China
  • 1300 Cities in China
  • 215 million digital members of KFC
  • 70 million digital members of Pizza Hut
  • 18 Billion market Cap in NYSE
  • 24 logistics centres
  • 450 000 employees in China


According to the projection by Yum China, they have the potential to grow to 20000 stores in the coming years over the long term.

Digital Strategy

Yum China plans to use the following to drive efficiency to its business:


  • Omnichannel Services
  • Data and AI-Driven Marketing
  • Intelligent Supply Chain
  • Optimising Labor Productivity



Investment Highlights


  • 2.3 Stores open per day since the spin-off
  • 7% CAGR for Total Revenue
  • 12% CAGR for Operating Profit
  • $1.66bn Cash and short-term investments as of 2019 end
  • Free Cash Flow 750 million (Jan - Dec 2019)
  • Bloomberg GenderEquality Index (1 of 3 Chinese companies selected) for 2 years
  • Names "Top Employer China" by The Employers Institute for 2 years
  • DJSI: Top 5 in REX industry (Restaurant and Leisure) 
  • Ranked # 362 on the Fortune 500 list for 2019



Q4 2019: Solid Growth


  • System sales growth of 8%
  • 13th consecutive quarter of positive system sales growth
  • Operating Profit growth of 14%
  • World’s leading restaurant membership with 240mn+ members
  • Over 50% of sales from members
  • Delivery contributed 23%of sales, +3ppts y/y
  • Opened 360 new stores, reaching a total of 9,200 stores
  • Maintained new store cash payback of ~2 years for KFC and 3-4 years for Pizza Hut
  • Returned $102 million to shareholders
  • Declare dividend of $0.12 per share, payable in March 2020



Restaurant Margin

Yum China restaurant margin was 12.4% in the fourth quarter of 2019 and 16.0% in the full year 2019, compared with 11.5% and 15.7% in the prior year periods, primarily attributable to sales leverage, productivity improvement and other cost savings, partially offset by wage and commodity inflation and promotional activities.



Outlook and Strategic Priorities

2020 FINANCIAL TARGETS
800-850 gross new units
$500-550 million Capex
Targets subject to revision based on the impact from coronavirus


STRATEGIC PRIORITIES
Focus on expanding our core brands – KFC & Pizza Hut
Invest in key growth opportunities including our emerging brands
Leverage and invest in our digital, supply chain and technology capabilities
Vigilant cost management to offset cost inflation (e.g., labor and chicken)


Yum promises to:
Focus to overcome the challenges of coronavirus, and to protect the health and safety of their employees and customers

With these, they launched the contactless delivery.



Impact of Coronavirus Outbreak
Since the start of the year, the novel coronavirus outbreak in China has significantly impacted the Company's operations. The situation is complex and rapidly evolving, and the Company cannot yet fully ascertain the expected impact. However, based on information currently available, the Company believes that the outbreak is likely to have a materially adverse impact on the Company's operating and financial results for the first quarter of 2020 and full year 2020.

The Company has taken a number of measures to protect its employees, customers and business partners, including the temporary closure of more than 30% of its restaurants in China.

For restaurants that remain open, same-store sales since the Chinese New Year holiday period were down 40-50% compared to the comparable Chinese New Year holiday period in 2019, due to shortened operating hours, reduced traffic and other factors related to the outbreak.

At this time, the Company cannot forecast when the closed restaurants will re-open (and at what rate) and the traffic will be restored (and at what level), or the other factors relating to the outbreak that will continue to impact the Company's operations. Furthermore, the Company may be required or otherwise decide to close additional stores, reduce operating hours, or take other steps, as the situation warrants.

As a result of the outbreak, the Company may experience operating losses for the first quarter of 2020, and if the sales trend continues, for the full year 2020.

Future operations, as well as the Company's cash flows and financial position, may be materially and adversely influenced by further developments related to the outbreak, including potential additional announcements and actions from the central government and local authorities, disruption in our supply chain, inability to provide safety measures to protect our employees, or other reasons.

Listen to the latest Q4 Results by Joey Wat, the CEO of Yum China here:




What do you think of Yum China?
Do you think this is the time to accumulate Yum China, since the stock is beaten down due to the Coronavirus outbreak?



Analyst Studies


According to Simply Wallstreet,  the fair value is 49.5% undervalued.
If we follow this valuation, could be good to accumulate the stocks.

Valuation

Fair Value: US 88.80
Current Value: US 44.85

PE Ratio

Company      23.7x
Industry        24.2x
Market         18.3x


Based on PE Ratio, this is not that high.


PEG Ratio
*Source Finviz

Comparison of peers:

Yum China:          2.41
Yum! Brands:       2.13
McDonald's:         3.63
Domino Pizza:     2.52
Papa John:           NA
Starbucks:           2.76


In terms of PEG Ratio by Finviz, PEG Ratio is at 2.41.

This is considered slightly high.
It would be best to get it below PEG Ratio of 1.5.
So 2.41 is considered a bit premium.

However, Mcdonalds is having PEG Ratio of 3.63

With this, Yum China is a better deal than Mcdonalds in term of PEG Ratio valuation.


P/B Ratio

Company           5.5x
Industry             2.2x
Market             1.8x


Growth

YUMC's forecast earnings growth (10.3% per year) is above the savings rate (1.7%).


ROE

Company     23.4%
Industry       13.8%

The ROE is considered quite good and high.


Dividend Yield

Yum China dividend yield is at 1.07%

The dividend payout ratio is at 25.4%.
Easily covered by the earnings.


Technical Analysis


Since early of 2019, the share price is on the uptrend.

With the recent of coronavirus issue in Jan 2020, the share price has dropped from about US 50 (16 Jan 2020) to recently about US 45 (14 Feb 2020).

I think that this is a short term issue.

Heikin Ashi - shows that the share price is showing the uptrend signal.

Resistance - the share price has dropped below the 200 MA. And it seems that the share price is trying to bounce back above 200 MA trendline.

Trendline - The 50 MA is above 150 MA, and 150 is above 200 MA. The long term uptrend is still intact for now.

We need to see the share price to go back to above 50 MA, so that the uptrend will remains.

MACD - it seems that MACD is showing signs of reversal to the uptrend. However, it is still at the negative zone. So it may continue to go lower.

RSI - has bounced off from the oversold zone. With RSI ~48, this is quite a healthy uptrend line.





Fibonacci Retracement

The share price has hit the 50 Fibonacci Retracement and bounced back.
If the coming days is break above US 46, it will go back to the uptrend again.





Overall, the share price is showing sign of uptrend again after bounced back from the 50 FR support line.



Yum China Analysis

In my opinion, the recent Coronavirus outbreak may pose a good opportunity for long-term investors.

This company is still growing at a good pace.
There should much more growth story for the company.

With more stores opening, sales will definitely increase over time.
Thus, profit will also follow through as well.

Suggest to slowly accumulate.

I plan to acquire the shares to do covered call options strategy to collect options monthly premium.

Before I officially acquire the stocks, I plan to use cash-secured put options to acquire the stocks.
This will lower my entry price and also lower down the risk.
The purpose is to provide more margin of safety.
This will lower my cost of acquiring the stocks.




Reference:
http://ir.yumchina.com/static-files/571a9284-70ee-4d55-90ab-3ed0fb652bc1
http://ir.yumchina.com/news-releases/news-release-details/yum-china-reports-fourth-quarter-and-fiscal-year-2019-results
http://www.daojia.com.cn/
https://www.cnbc.com/2018/09/06/kfc-mcdonalds-burger-king-pizza-hut-china.html
https://www.businessinsider.my/most-popular-fast-food-chain-in-china-kfc-photos-2018-4/?r=US&IR=T
https://en.wikipedia.org/wiki/Fast_food_in_China
https://simplywall.st/stocks/us/consumer-services/nyse-yumc/yum-china-holdings



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Happy Investing! 😉



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