Analyst Note| Ivan Su |
Our biggest takeaway from Yum China's earnings is that Pizza Hut is starting to fully reap the benefits of multiple years of revitalization efforts. This was shown through Pizza Hut's restaurant margin of 15.3% in the first quarter of 2021 (the highest level since 2017), while consumer traffic surpassed 2019's level despite lingering COVID-19 challenges. In the past, we've heard numerous investors expressing a lack of confidence in Pizza Hut's turnaround initiatives and concerns over the long-term outlook for the brand in China. We held the view that improvements in Pizza Hut were initially going to show up in 2020 financials, but COVID-19 disrupted what otherwise would have been a faster and more even comeback. Strong Pizza Hut numbers give us confidence that the company can sustain a midteens restaurant margin over the next few years and even achieve high teens over the longer period. After factoring in expectations for stronger traffic and profitability, our fair value estimate for Yum China goes up by 7% to USD 79 (HKD 613). We continue to view the shares as undervalued and believe the market is overlooking Yum China's opportunities for market share and unit expansion in the highly fragmented Chinese restaurant market.