Yum China: Investor Day Offered Upbeat Financial Targets; Shares Undervalued

Yum China’s YUMC 2023 investor day offered upbeat medium-term financial targets and reinforced our wide moat rating and positive long-term thesis. We continue to view Yum China as the safest way to gain exposure to the growth of the Chinese middle class in the next decade, presenting a compelling combination of free cash growth and decent capital allocation. We keep our fair value estimate at USD 84 (HKD 659). The company’s shares remain undervalued, trading at a significant discount of 30% to our fair value estimate.

There were three encouraging updates to Yum China’s 2024-26 guidance: 1) management raised its annual net unit opening guidance to 1,800, a significant step-up from previous guidance of about 1,300—this makes the 2026 target of 20,000 total units achievable; 2) it aims for double-digit annual EPS growth, pointing to continued profitability improvement; and 3) it targets returning USD 1 billion to shareholders annually, representing a more than 40% increase to the USD 700 million run rate in 2023.