Here’s what investors need to know about Yum China Holdings Inc (NYSE: YUMC) before it lists shares in Hong Kong in early September. –
The largest restaurant company in China, Yum China Holdings Inc (NYSE: YUMC), has filed for a secondary listing in Hong Kong.
It’s expected to be listed on 10 September. In this article, I’ll highlight the three things investors should know about the company before deciding whether to buy the stock.
1. The market
Unlike in the US, the restaurant industry in China is highly fragmented – the top five players have less than 5% of market share.
Restaurants in China can be divided by their service type into a few main categories – quick-service restaurant (QSR), casual dining restaurant (CDR), formal dining, and others.
As suggested by their names, QSR includes fast-food restaurants that have little or no table service, while CDR refers to those that provide some table service.
Formal dining in China mostly consists of traditional Chinese restaurants with full table service.
Formal dining is by far the largest segment, accounting for around 60% of the restaurant industry in China in 2019.
Compared to the US, the restaurant market in China has high growth potential, as evidenced by the low restaurant spending per capita.
Restaurant spending per capita in China in 2019 was only US$2.50 per day while the equivalent in the US was around US$15.
Although formal dining accounts for the majority of the restaurant types in China, QSR is expected to have the strongest growth of 8.3%, followed by CDR (7.9% annual growth), over the next five years.
This is driven by favourable factors such as increasing disposable income and urbanisation, especially in second-tier cities.
2. The company
As the Chinese restaurant market is highly fragmented, Yum China, with a 1.4% market share in the catering service market, is the largest restaurant company in China.
Under its corporate umbrella, Yum China owns the operations of KFC (QSR), Pizza Hut (CDR), and Taco Bell (QSR) in China.
It also owns the brands and the intellectual property (IP) of Little Sheep, Huang Ji Huang, COFFii & Joy, and East Dawning.
KFC and Pizza Hut are the two main contributors to Yum China’s revenue. In 2019, KFC and Pizza Hut contributed around 70% and 25% of the group’s total revenue, respectively.
In the first half of 2020, due to the impact of Covid-19, Yum China had a same-store sales decline of 13%, as compared to a 3% increase in 2019.
Compared to the other Hong Kong-listed restaurant company, Haidilao International Holding Ltd (SEHK: 6862), which had a 20% same-store sales decline in the first half of 2020, Yum China seemed to be in a slightly better position.
Thanks to Yum China’s strong presence in the QSR and CDR segments, through its operations of KFC, Pizza Hut and Taco Bell in China, it’s expected to benefit from the restaurant segments that are going to demonstrate the highest growth in the next five years.
3. The valuation
Investors can benchmark the valuation of Yum China to the other three listed Chinese catering companies in Hong Kong; Haidilao, Xiabuxiabu Catering Management (SEHK: 520) and Jiumaojiu International Holdings Ltd (SEHK: 9922).
On a forward price-to-earnings (PE) basis, Yum China is currently trading at around 34x. This is line with Xiabuxiabu’s 34x forward PE, but significantly lower than Haidilao’s 85x and Jiumaojiu’s 91x.
Looking at the company on its own, for the majority of the time since Yum China has been listed, the company has been trading below 30x forward PE.
Although Yum China is currently trading at a richer valuation, compared to its Chinese peers, it still seems to be relatively undervalued.
Overall, Yum China, thanks to the operations of KFC, Pizza Hut, and Taco Bell in China, is well poised to benefit from the restaurant segments that are expected to have the most robust growth in the coming years.
This can be attributed to internal consumption upgrade and further urbanization in the world’s second-largest economy.
Its valuation, albeit higher than its previous level, still seems low compared to the other Chinese peers. In my opinion, this could be a consumer stock that offers a good balance between value and growth.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Alec Tseung doesn’t own shares of any companies mentioned.
The Motley Fool Hong Kong Limited(www.fool.hk) 2020