Everbright Securities: Yum China (09987) maintains a “buy” rating by speeding up store opening and improving profit margins

The Zhitong Finance App learned that Everbright Securities released a research report stating that maintaining Yum Sheng China (09987)'s net profit forecast for 2026-2028 was US$10.27/11.09/1.83 billion US dollars, respectively, equivalent to EPS of US$3.04/3.28/3.50 US dollars for 2026-2028. The current stock price corresponding to 2026-2028 PE is 16x/15x/14x, respectively. The company is a leading Western-style fast food company with strong digitalization and supply chain capabilities. The two core brands still have some room for growth in terms of channel decline and maintain a “buy” rating.

The main views of Everbright Securities are as follows:

Incident: 26Q3 Yum China achieved revenue of US$3.477 billion, +8% (or +2%, not counting the impact of foreign currency conversion); realized operating profit of US$451 million, +13% YoY (or +6%, not counting the impact of foreign currency conversion); net profit to mother of US$311 million, +10% YoY; operating margin of 13.0%, +0.5pcts year on year, up for the tenth consecutive quarter.

Store sales were under pressure for a short period of time, and operating performance improved marginally in September. 1) Same-store sales: 26Q3 overall same-store sales ratio -3%, mainly due to the high base formed by takeout platform subsidies in the same period last year and unfavorable weather in August. The store sales index improved month-on-month in September; same-store transaction volume increased +3% year over year, for the 15th consecutive quarter. By brand, KFC's same-store sales volume was -3% YoY, transaction volume +3% YoY, customer unit price -5%; Pizza Hut's same-store sales were -3% YoY, transaction volume +5% YoY, customer unit price -8% YoY. The increase in small orders and cost-effective strategies continued to drive customer traffic.

2) Takeout business: Takeout sales were +7% year-on-year in 26Q3, and the growth rate slowed down due to declining platform subsidies. Takeout accounted for 54% of restaurant revenue, +3pcts year over year, flat month-on-month; KFC and Pizza Hut's takeout accounted for 54% and 53% respectively. The company attracted customers to return to the store through exclusive in-store offers, in-store experience, and take-out convenience, and dine-in and takeout performance improved sequentially.

3) Store expansion: 692 new stores were added in 26Q3, a record high in a single quarter, with franchise stores accounting for 44%; KFC and Pizza Hut added 518 and 191 new stores respectively. As of the end of September, there were 19989 main stores, including 14,307 KFC and 4,740 Pizza Hut. The company raised the target of net new stores for the year to over 2,400, the target for general stores to exceed 20,500 at the end of the year, and the target share of franchisees in the net new stores of KFC and Pizza Hut is 40% to 50%. More than half of the new stores are located in new cities, special channels, or business districts that do not yet have dine-in or delivery coverage; flexible store types such as KFC small town stores, Pizza Hut WOW, and Gemini parallel stores are tailored to suit low-tier markets to improve channel adaptability.

Operating margins increased for the tenth consecutive quarter, and the benefits of Pizza Hut brand acquisitions began to be unleashed. 1) Profitability: 26Q3's overall restaurant profit margin was 17.8%, +0.5pcts year over year, mainly due to streamlined operations and favorable raw material prices to offset the cost pressure brought about by cost-effective products, declining same-store sales and increased share of takeout. Pizza Hut's franchise fee savings also contributed to profit growth. By brand, 26Q3 KFC restaurant's profit margin was 18.6%, the ratio was +0.1 pcts; Pizza Hut's profit margin was 15.3%, +1.9 pcts year over year. The company completed Pizza Hut's acquisition of brand ownership in mainland China on August 7, eliminating brand franchise fees, streamlining and automating operations, and boosting Pizza Hut's profitability. 2) Shareholder feedback: 26Q3 gave back US$362 million to shareholders, including US$263 million in share repurchases and US$99 million in cash dividends. The goal of returning US$1.5 billion for the whole year remains unchanged. The board of directors approved an increase of 1 billion US dollars in share repurchase authorization in November, and the remaining authorization after the increase was about 1.3 billion US dollars; at the same time, a cash dividend of 0.29 US dollars per share was declared, which is expected to be paid on December 22. Starting in 2027, the company plans to return about 100% of free cash flow to shareholders after deducting dividends to minority shareholders of subsidiaries. The average annual return is expected to be 900 million to more than 1 billion US dollars from 2027 to 2028, and the scale of the return will exceed 1 billion US dollars in 2028.

New businesses expand at an accelerated pace, and model innovation continues to contribute incrementally. 1) Kenyue Coffee: By the end of 26Q3, there were more than 4,000 stores, and the target for 2027 was over 5,000; during the peak summer period, sales of apple bubbles exceeded 1 million cups per week, and sales of non-coffee drinks in the third quarter increased more than tripled year-on-year, and the expansion of the beverage category continued to enrich consumption scenarios.

2) KPRO Kenryu Light Food: By the end of 26Q3, there were over 700 stores, covering about 250 cities, and sales and profit performance were better than the internal model; the target was raised to over 850 by the end of 2026, and the target for 2027 was 1,500.

3) Pizza Hut Hamburg: The Hamburg module has been expanded to over 300 stores, covering 50 cities, bringing double-digit sales growth and significant profit contributions to the parent store. The goal is to cover more than 500 in 2026 and more than 1,000 in 2027; Pizza Hut's burger category's sales target in 2026 is to exceed 1 billion yuan.

4) “Express Pickup” service: It has covered more than 9,000 KFC stores, and the target is to cover more than 10,000 in 2026, and achieve sales of 1 billion yuan. The convenient experience is expected to drive the growth of the takeaway business. Looking forward to the future, channel decline, category expansion, and cost optimization will jointly support medium-term growth, and brand acquisition benefits are expected to be gradually released.