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Stock Strategist

Consumption Trends Power Yum China

The wide-moat firm is one of the most direct ways to invest in Chinese consumers’ increased spending.

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 Yum China (YUMC) was spun off as an independent, publicly traded company in October 2016, although it is still a trademark licensee of Yum Brands (YUM). Sales trends have been uneven at times amid macroeconomic uncertainty, a changing competitive set, evolving consumer views regarding health and wellness, and executional missteps, but we still view Yum China as a wide-moat-rated business thanks to its powerful brand intangible asset in the region, as well as unparalleled distribution infrastructure and local site development teams.

We find longer-term division goals of high-single-digit system sales, 17% restaurant margins (after the 3% of systemwide sales licensing fee paid to Yum Brands), and midteens earnings per share growth realistic, based on favorable China consumer demographic trends and the operating leverage inherent in the business model.

R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.