Yum China Earnings: Despite Ongoing Macro Challenges, Long-Term Growth Potential Remains

Wide-moat Yum China delivered a mix bag of results for the first quarter, with revenue falling behind our estimate but net profit in line. Management indicates continued pressures on average ticket sizes in the near term, reflecting consumer downtrading and rising competition. Despite the near-term challenges confronting Yum China, especially those related to macroeconomic weakness, our confidence in the company's double-digit revenue growth and margin expansion outlook over the medium term remains unchanged. We cut our earnings estimates for 2024-26 by an average of 8% to reflect the lower ticket averages and reduce our fair value estimate to $76 per share from $80. But with Yum China shares still trading at a significant discount to our revised fair value, we continue to view its shares as undervalued.