Yum China Earnings: China Reopening Translates to Record Revenue and Profit

Wide-moat Yum China’s YUMC first-quarter earnings were largely in line with our expectations, but they came significantly above Refinitiv consensus estimates. Management remains rightfully upbeat on the rest of this year as reopening boosts restaurant traffic. Overall, we maintain our USD 84 fair value estimate and continue to view shares as undervalued. We believe Yum’s current share price overlooks two things: 1) Yum China’s opportunities for unit expansion in China’s growing fast-food industry; and 2) further margin expansion that will be realized by operating leverage and ongoing digital investments.

In the first quarter, revenue increased 9% year over year, or 18%, excluding foreign currency translation. Solid sales performance came following China’s pivot away from zero-COVID, and we expect the growth momentum to pick up as domestic travel soars. Adjusted operating profit increased 117% year over year to USD 419 million from USD 193 million. Adjusted operating margin reached 14.4%, the highest since 2017. The significant expansion was driven by sales leveraging, cost reduction initiatives in recent years, and various investments in improving operating efficiency.

Management maintained 2023 guidance—calling for a net unit opening of between 1,100 and 1,300 net new stores and a USD 700 million to USD 900 million capital expenditure budget. We also expect Yum China to continue investing in technology and supply chain infrastructure, which should generate more cost savings as the firm further expands its restaurant brands across China.

We expect 2023 to be a strong recovery year, including 24% revenue growth and an adjusted operating margin of 12.1%, one notch higher than the 10.4% we saw in 2019. This would put Yum China on track to meet our five-year targets calling for 13% annual revenue growth and operating margins reaching 15.5% by 2027.