2Q24E 很艰难 ， 但仍有可能扭亏为盈

2Q24E is tough but turnaround is still possibleo Target PriceHK$348.13(Previous TPHK$384.17)Up/Downside18.3%Current PriceHK$294.40 The 1Q24results of Yum China weresatisfactory, however the catering industryremain subdued and hence we have become more cautious about YUMC’s2Q24E outlook. Butsincethe turnaround in 2H24E should still be intact, plusthe massivebuybackand dividendpayment, we continue to maintain BUY.1Q24resultsroughly inline.For 1Q24, Yum China’s sales increased by 1% YoY to US$ 2.96bn,missingCMBI est. by 6%, due to: 1) slight miss inPizza Hut’s SSSG (fell by 5% vs CMBI est. of-3%), 2) CNY depreciation, 3)lower-than-expected sales per store (as a result of smaller-sized newstores). But net profit only fell by 1% YoY to US$ 287mn, inline with CMBIest.,consisted of:1)lower-than-expected GP margin(due to heavypromotions) but 2) better-than-expected rent and other opex and G&Aexpenses. In terms of segment, delivery sales grew strongly by 8% whiledine-in sales fell by 2%. KFC’s SSS was resilient and dropped by just 2%while Pizza Hut’s SSS fell by 5%, and KFC/ Pizza Hut’s restaurant level OPmargin were at 19.3%/ 12.5%, 2.9ppt/ 1.7ppt lower than last year.We are conservative about 2Q24E but still expect a turnaround in China ConsumerDiscretionary Walter WOO(852) 3761 8776walterwoo@cmbi.com.hk 2H24E.EventhoughYum China’s 1Q24resultsweremuted but we tend tobelieve this was mostly due toitshighly fragmented industry nature (whereprice war could intensify easily when the economic growth slowed down). Infact, under these macro circumstances, the fast food segment has alreadyoutperformed and we are pleased by Yum China’s successful executionofplanned strategy of “driving transaction and sales while protecting themargin”. Going forward in 2Q24E, we believe Yum China’s strategy willcontinue: 1)a series of new product launches (e.g. Pizza Hut’s PizzaBurger), 2) more value for money products (e.g. more Pizza Hut pricedbelow RMB 50), 3) more small orders (e.g. one person meal or for delivery)and 4) K-coffeecontinuesto be popular (30% YoY volume growth in 1Q24,boosted by new product like sparking coffee), more side by side K-coffeestandscould be opened in the near future (kitchen will be shared with KFCstoresand hence margin is protected).However we would still beconservative about 2Q24E, because of: 1) the high base effect (strong salesgrowth) and 2) margin drag, due to absence ofother income and tax reliefsofUS$12mn last year and heavy promotions(even though themanagement will step up its costs saving in the G&A expenses (could drivedown to just 5% of sales), by its Project Fresh Eye and its AI technology).While the3-yeargrowth target during FY23-26E (HSD to double digit salesand double digit EPS) could still be intact, we have become slightly moreconservative and now forecast only 4%/3% sales/ net profit growth inFY24E.But we are still expecting apickupin 2H24E.Maintain BUY but trim TP to HK$ 348.13.Our new TP is based on 23x Source: FactSet FY24E P/E (revised down from 24x) still around 1 s.d. below5-yearaverageP/E of 27x. We revised down FY24E/ 25E/ 26E net profit by 5.4%/ 5.0%/4.4% to reflect: 1) slower-than-expected salesgrowth, 2) lower sales perstore, 3) lower GP margin and 4) weaker operating leverage, etc. Thecounter is now trading at 19x FY24E P/E.EarningsSummary Store opening and capex plan remained intact.Yum China has opened 378 netnew stores in 1Q24, representing 14% YoY growth, much faster than the 10% to12% growth implied by the FY24E target of 1,500 to 1,700 net new store openings.Noted thatthenumber of restaurants for other brands has actually decreased butthat was only due to the downsizing of Taco bell while the Little Sheep and HuangJi Huang are still growing.Nochangeon thebuybackand dividend plan in FY24E.The Company willcontinue its plan to buy back shares worth of US$ 1.25bn and roughly dividend worthof US$ 275mn in FY24E. Disclosures& Disclaimers Analyst CertificationThe research analyst who is primary responsible for the content of this research report, in whole or in part, certifies thatwith respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2)no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report.Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to thedate of issue of this report; (2) willdeal in or trade in the stock(s) covered in this research report 3 business days afterthe date of issue of this report; (3) serve as an officer of any of the HongKong listed companies covered in this report; and (4) have