Why Investing in Yum China can be Lucrative Value Investors

Dear PGM Blog reader,

In this weekend blog article, we want to take the opportunity to discuss with you, why Investing in Yum China, can be lucrative for value investors.

INTRODUCTION:

Yum China Holdings Inc. is an American-Chinese Fortune 500 fast-food restaurant company incorporated in the United States and is co-headquartered in Shanghai, China and Plano,Texas USA, and operates, and franchises restaurants in China.

The company operates in two segments, KFC and Pizza Hut. It operates restaurants under the KFC, Pizza Hut, Taco Bell, East Dawning, and Little Sheep brands, which specialize in chicken, pizza, hot pot cooking, Chinese food, and Mexican-style food categories. The company also provides online food delivery services.

With US$ 7.144 billion of revenue in December 2017, the company operated approximately 5,400 KFC restaurants; 2,100 Pizza Hut restaurants; 280 Little Sheep units; 10 East Dawning restaurants; and 3 Taco Bell restaurants. It is the largest restaurant company in China. It was spun off from Yum! Brands (NYSE:YUM), and became an independent, publicly traded company on the NYSE under the symbol YUMC, on 1 November 2016.

The company operates more than 7,800 restaurants over 1,100 cities and towns spanning every province and autonomous region across Mainland China, and has a workforce of 420,000 employees, representing the 3rd largest labour force in the world.

Q2-2018 FINANCIAL RESULTS:

On Thursday, August 2, Yum China Holdings reported a quarterly earnings of $0.36 per share, beating the analyst consensus estimate of $0.33 per share. This compares to earnings of $0.27 per share a year ago.

The quarter’s numbers:

Metric Q2 2018 Q2 2017 YOY Increase
Revenue $2.07 billion $1.84 billion 12%
Operating expenses $1.88 billion $1.67 billion 12%
Earnings per share $0.36 $0.31 16%

Highlights:

  • Adjusted operating profit totaled $193 million, up 13% from the year-ago quarter. Net income increased 14% to $143 million from $125 million in the prior-year period.
  • Cash and cash equivalents as of Jun 30, 2018 summed $1,261 million compared with $1,059 million as of Dec 31, 2017.
  • The company’s board of directors declared a cash dividend of 10 cents per share on common stock, payable Sep 19, 2018 to its stockholders of record at the close of business on Aug 29, 2018.
  • Additionally, Yum China repurchased 1.9 million shares for $73.4 million.

PGM CAPITAL ANALYSIS & COMMENTS:

On that front, Yum China has now opened 365 new locations in 2018 through the end of the second quarter, bringing its total store count to 8,198. That’s better than 6% increase from the year prior, and don’t expect that expansion to slow down. The chain thinks that the country can eventually support 20,000 KFC and Pizza Hut stores.

Hillhouse Capital Group deal:

On Tuesday July 26, less than two years after splitting from former parent Yum! Brands, Chinese investment firm Hillhouse Capital Group is apparently interested in acquiring the fast food chain.

Hillhouse is planning to recruit other investors to form a consortium for its bid to buy Yum China, according to The Information, which cited three people familiar with the matter.

Hillhouse, an investment firm founded in 2005, has investments in a host of Chinese companies including Baidu Inc, and JD.com Inc , as well as U.S. short-term home rental service Airbnb, according to its website.

Neither Hillhouse nor Yum China were immediately available for comment outside regular business hours.

Outlook:

Below chart shows that the shares of Yum China since its IPO in November 2016, has outperform the ones of its parent company YUM Brands!

Based on the company’s fundamentals, we have initiated our coverage on the shares of Yum China with a Buy rating.

Disclosure:

We are long the shares of Yum China Holdings.

Last but not least, before taking any investment decision, always take your investment horizon and risk tolerance into consideration and keep in mind that; share prices don’t move in a straight line, that Past Performance Is Not Indicative Of Future Results and that technology stocks and stocks of emerging markets, experience a higher volatility than the ones of develop market big-caps.

Yours sincerely,

Eric Panneflek

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