Yum China: Fine-Tuning Near-Term Estimates; Shares Undervalued

We fine-tune our forecasts for wide-moat Yum China but maintain our fair value estimate of $80 per share. The first quarter of 2024 posed challenges for restaurant operators, primarily due to the high base effect associated with initial covid-19 reopening. Moving into the second quarter, we have seen demand growth normalizing, alleviating the impact of the previous high base effect and allowing for a clearer assessment of same-store sales growth. While we remain cognizant of potential macroeconomic uncertainty, our base-case scenario anticipates a slightly more favorable operating environment for restaurants in 2024, compared with the latter part of 2023. Yum China remains our top pick in the Chinese restaurant space. We believe the market is overlooking Yum China's opportunities for market share and unit expansion in the highly fragmented restaurant market.