Analyst Note| Ivan Su |
Wide-moat Yum China's third-quarter 2022 results reinforce our view that the firm will come out of the coronavirus pandemic as a more resilient and profitable business. Sporadic lockdowns and uneven spending patterns over the past year pushed Yum China to accelerate cost cuts, resulting in a quarter of record-breaking profitability at KFC. While China's zero-tolerance policy remains the biggest near-term headwind to restaurants, the size of Yum China's off-premise business (over 60% of revenue) positions the firm to outperform its peers. We maintain our $84 (HKD 659) fair value estimate and view Yum China shares as heavily undervalued—trading at a 50% discount to our fair value estimate). Despite shares rallying by more than 10% during Hong Kong trading, we still think investors are underestimating the firm's long-term growth prospects and potential for further margin expansion.