november 17th, 2017 - unc alpha...
TRANSCRIPT
November 17th, 2017
Students: Tingliang Guo, Mohan Ru, David Wang Company: Yum China Holdings Inc (NYSE: YUMC)Action: LongPrice Target: $58 (39% upside)
Overview
Action: Long | Price Target: $58 | Upside: 39%
Yum China Holdings Inc (NYSE: YUMC)
✓ The largest restaurant company in China
✓ Brands includes KFC, Pizza Hut, Little Sheep, Taco Bell, East Dawning
✓ Earliest restaurant chain to adopt digital payment in China
✓ Spin off from Yum! Brands (YUM) on Nov 1, 2016
✓ After the separation from YUM, YUMC will pay a 3% license fee to YUM for the right tosublicense KFC and PH intellectual property in China
✓ Joint headquarters: Shanghai, China and Plano, TX USA
✓ ~420,000 employees and ~7,300 restaurants over 1000 cities
Core Brands (96% of sales): KFC (70% of sales): ~5100 storesPizza Hut (26% of sales): ~2000 stores
Other Brands (4% of sales):
Capitalization Trading Stats Target Price
Source: Company Information, Capital IQ
1
Share Price (11/10) 41.73
Total Shares Outs. 385
Market Cap 16,055
(-): Cash (1,477)
(+): Debt -
(+): Minority Interest 70
Enterprise Value 14,648
52 Week Hi / Lo 43.5 / 25.5
2018 EV / EBITDA 11.1x
2019 EV / EBITDA 10.2x
2018 P / E 25.4x
2019 P / E 22.7x
Target Price 58$
Implied Valuation
Consensus Us
2018 EV / EBITDA 15.7x 13.5x
2019 EV / EBITDA 14.7x 11.0x
2018 P / E 35.9x 28.2x
2019 P / E 32.1x 21.7x
The Western-Style QSR1 Industry in China
Highly fragmented industry, rapid growth, KFC dominant, cashless
QSR industry in China is highly fragmented
Source: Company report, McKinsey & Company 1.QSR – Quick Service Restaurant
Rapid, sustainable sales growth
KFC largest chain by unit count, followed by McDonald’s Digital + delivery key to competing
2
Why Yum China?
Store count grows at high-single-digit in a rapidly growing, under-penetrated market (especially in lower-tier cities), increasing margins with operating leverage
SSSg improves to mid-single-digit with best-in-class integrated digital + delivery ecosystem – the Domino’s model
Local, experienced, and focused management could deliver additional upside from Pizza Hut turnaround
1
2
3
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Historical store growth impressive, but potential even greater
Source: Worldbank, Statista, Broker Research
Still low penetration in a young, rapidly richer, and urbanizing economy
China’s QSR industry in 10x under-indexed
1
1,263
927
694
524
340 267 223 172
78 42 17 8 4 0
200
400
600
800
1000
1200
1400
Sou
th K
orea
Taiwan
Japan
USA
Ho
ng K
on
g
Singap
ore
Thailan
d
Malaysia
Ph
ilipin
es
Ch
ina
Ind
on
esia
Vietn
am
Ind
ia
No of Fast Food Chain / MM population, 2016
Avg = 351
0
2
4
6
8
10
12
24,072 14,926 12,343 10,771 9,671 7,578 5,105 2,279
Avg GDP of City Tiers
# of Western QSR / MM population
Lower-tier cities further below average
Chain Restaurants as % Total Restaurant
QSR penetration correlated with GDP per capita, suggesting China has huge potential to grow
ChinaIndiaVietnam
ThailandPhilipines
Malaysia
TaiwanSouth Korea
JapanHong Kong
USASingapore
China, 2027
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
0% 5% 10% 15% 20% 25%
6.0% GDP GAGR => Store # up 10x
in 10 years
4
GDP per Capita
Why does growth matter?
Business has significant operating leverage
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25%
27%
29%
31%
33%
35%
37%
39%
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
1Q
17
2Q
17
3Q
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Costs as % of Revenue
Occupany Costs Food and Paper
Significant Operating Leverage• Large fixed cost base (egrent) creates significant operating leverage. Growth is important to cash flow growth
• Expansion into 2nd and 3rd
tier cities likely to further lower % occupancy costs, as lower rents support same menu pricing and traffic
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
1000
2000
3000
4000
5000
6000
7000
8000
2013 2014 2015 2016
Store Count & Restaurant Margins
Store Count Growth
Restaurant Margin
Cash Flow % of Revenue
Store Count significant driver of cash flow
Source: company infomrmation
5
YUMC has the most integrated digital ecosystem in QSR
KFC – Leader in digital:
- KFC iOS App ranks No 3 in Food and Drink Category (top 2 apps are aggregators). Downloaded 30 million times
- Top two QSR brands are KFC and Pizza Hut
Benefits:
- Deliver SSSg without need to remodel / expand store
- Higher margins from savings on labor and other opex
- Customer loyalty: 33% of KFC sales comes from KFC members, helped by the launch of KFC Super App
- Potential new business model (eg high speed rail sale)
2
Source: aso100.com, company information
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Why does digital matter in China?
China's Cashless Revolution
- In 2016, China’s mobile payments hit $9 trillion, roughly 80 times the size of America’s $112 billion market
- China’s mobile payment lead due to lack of alternatives (such as convenient credit card) and low denomination of paper currency
- Digital strategy lynchpin to success in China, where availability of mobile channels can drive purchase decisions, especially young consumers
2
Source: iResearch, Wall Street Journal
The Amazon – retail effect: digital is necessity
7
Why does digital matter?
Case Study - Domino's Pizza in US
The Internet of Pizza – just the latest digital topping for Domino’s (NYSE:DPZ)
- Domino’s builds customer loyalty and lowers costs with best-in-class digital tech in US
- Between 2006 and 2008 Domino’s Pizza was in crisis – negative SSSg and plummeting sales
- Launched app April 2011 - digital sales surpass $ 1 billion within one year. SSSg improves to 10% by 2010
- Immense shareholder value from successful strategy
In US Market
2
Source: Domino’s Pizza company information
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Strong potential upside from Pizza Hut
New management experienced with turnarounds
- Under Joey Wat since 2014, KFCstaged impressive turnaround after being hit by food safety scandals
- Joey became YUMC COO in Feb 2017 and will be CEO in March 2018
- Significant knowledge transfer to Pizza Hut with replicable turnaround strategies
o Focus on food: slimdown of menu to focus on hits and local favorites
o Moving to digital: Pizza Hut launched app in July 2017 and has synchronized membership with KFC
o New models: store and image upgrade, Bistro
- Long-term effort with short-term pain: investors remain in show-me mode. Potential upside as results prove
Joey Wat took charge of KFC
Pizza hut is rapidly moving digital following KFC playbook
KFC SSSg rebounded from food scandals under Ms. Wat
Pizaa Hut SSSg turns positive
• KFC’s SSSG improved from -14% in FY13 to 3% in FY16
• KFC’s restaurant margin increased from 11.4% in FY13 to 16.3% in FY16
3
Source: company information
9
How much difference does Pizza Hut turnaround make?
Key to Maintain Restaurant Margins
3
10
Sensitivty of 2019 EBITDA to Pizza Hut Turnaround
Pizza Hut Restaurant Margin in 2018
1554.9064 12.0% 14.0% 16.0% 18.3% 20.0% 22.0%
-2.4% 1,693 1,736 1,779 1,829 1,865 1,908
-0.4% 1,731 1,774 1,817 1,866 1,903 1,946
Pizza Hut 1.6% 1,770 1,813 1,856 1,905 1,942 1,985
Avg SSSg 3.6% 1,810 1,853 1,896 1,945 1,982 2,025
2018 5.6% 1,850 1,893 1,936 1,985 2,022 2,065
7.6% 1,892 1,935 1,978 2,027 2,064 2,107
9.6% 1,935 1,978 2,021 2,070 2,107 2,150
11.6% 1,979 2,022 2,065 2,114 2,151 2,194
Sensitivty of Share Price to Pizza Hut Turnaround (Based on 2019 EV / EBITDA)
Pizza Hut Restaurant Margin in 2018
12.0% 14.0% 16.0% 18.3% 20.0% 22.0%
-2.4% 52.1 53.4 54.6 56.0 57.1 58.3
-0.4% 53.2 54.4 55.7 57.1 58.1 59.4
Pizza Hut 1.6% 54.3 55.6 56.8 58.2 59.2 60.5
Avg SSSg 3.6% 55.5 56.7 57.9 59.3 60.4 61.6
2018 5.6% 56.6 57.9 59.1 60.5 61.5 62.8
7.6% 57.8 59.1 60.3 61.7 62.7 64.0
9.6% 59.1 60.3 61.5 62.9 64.0 65.2
11.6% 60.3 61.5 62.8 64.2 65.2 66.5
Valuation – Base Case
How we differ from consensus
Key assumptions: - Store count CAGR: 7% for KFC, 10% for Pizza Hut, hitting managements LT target of 20k stores
in 10 years - SSSg: gradual increase on digital + delivery leverage, with KFC converging to Domino’s current
SSSg in the next two years- Margins: assume slight leverage on occupancy costs (expansion into lower-tier cities) and labor
costs (digital channels) - Capex: assume baseline per-store capex on new stores and remodeling
11
Our View Consensus Difference
2017E 2018E 2019E 2020E 2017E 2018E 2019E 2020E 2017E 2018E 2019E 2020E
Revenue 7,062 7,922 9,160 10,637 Revenue 7,035 7,552 8,059 8,647 Revenue 0.4% 4.9% 13.7% 23.0%
% Growth 4.5% 12.2% 15.6% 16.1% % Growth 4.2% 7.3% 6.7% 7.3% % Growth
EBITDA 1,331 1,555 1,905 2,174 EBITDA 1,196 1,332 1,428 1,576 EBITDA 11.3% 16.7% 33.4% 38.0%
% Margin 18.8% 19.6% 20.8% 20.4% % Margin 17.0% 17.6% 17.7% 18.2% % Margin
EPS 1.76 2.06 2.69 3.12 EPS 1.42 1.62 1.81 2.14 EPS 24.0% 27.3% 48.4% 45.8%
% Growth 29.0% 17.2% 30.2% 16.1% % Growth 4.0% 14.1% 11.7% 18.2% % Growth
Valuation – Base Case
Methodology Metric Multiple Target Price ($/sh)
2019 EV / EBITDA $1,905MM 11.0x 58
2019 P / E $988MM 23.0x 59
SOTP 2019 EV / EBITDA 9.0x - 14.0x 68
DCF 59
DCF + Idle cash deployment 64
Getting to target price
12
Target price based on 2019 EV / EBITDA multiple, with sense check against other relative and intrinsic methodologies - EBITDA x most appropriate 1) capital structures differ significant due to different franchise vs. owned
splits 2) share buyback programs differ across peers- Two-year look-ahead for normalized Pizza Hut earnings post turnaround - SOTP assumes KFC trades up to DM-based QSR multiples, while Pizza Hut trades around Chinese QSR
multiples. DCF assumes 9.0% WACC and 3.0% terminal growth rate
Potential upside: unlocking value from capital structure
Management hints at more productive use of cash
-
500
1,000
1,500
2,000
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2017 2018 2019 2020 2021 2022
Hypothetical Cash Build without Div / Buyback
Cash Balance Unlevered FCF
• Highly cash generative business -> significant cash build without dividend / share buybacks
• However, management has announced intent to pursue “strategic acquisitions” funded by internal cash flows, in addition to share buyback
• While dividend / buybacks creates no enterprise value, strategic acquisitions using idle cash can provide value upside
• Additional interest tax shield could result if YUMC funds buyback with debt
Value of Cash Deployment 2017 2018 2019
Free Cash Flow 802 862 1,143
Commit. on Div / Buyback (150) (150) (150)
Cash to Deploy @ 80% 326 356 497
Increment EBITDA @ 20% IRR 136 171
Incremental Value (US$MM) 1,637 1,876
Incremental Share Price 4.26$ 4.88$
Share Price Impact Sensitivity @ 2018 EV / EBITDA
% Post-Div/Buyback Free Cash Flow Deloyed
4.26$ 10% 20.0% 30.0% 40.0% 50.0%
5.0% 0.2 0.4 0.6 0.9 1.1
10.0% 0.4 0.9 1.3 1.7 2.1
IRR on 15.0% 0.6 1.3 1.9 2.6 3.2
Cash 20.0% 0.9 1.7 2.6 3.4 4.3
Deployed 25.0% 1.1 2.1 3.2 4.3 5.3
30.0% 1.3 2.6 3.8 5.1 6.4
35.0% 1.5 3.0 4.5 6.0 7.5
Source: company information
13
Risk and Mitigants
1. Food safety and supplier risk
2. Labor and food cost inflation
3. Customers shift to new healthier food
4. Persistent foreign exchange headwinds
1. YUMC added more quality control experts and reduce number of supplier to reduce the food quality issues
2. High digital adoption and long-term supplier contract mitigates significant cost hikes. YUMC continues to upsell with menu upgrades and premium concept store roll-outs.
3. K Pro and Ph+ model are new concept stores providing high-end healthier food
4. Macroeconomic stability top priority of current administration, committed to stem persistent capital outflow
Risk Mitigants
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APPENDIX
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16
Income Statement
Income Statement
Fiscal Year 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2016 2017 2018 2019
Quarter 1 2 3 4 1 2 3 4 1 2 3 4
Company Sale 1,257 1,563 1,998 2,103 1,391 1,748 2,251 2,374 1,587 2,014 2,614 2,761 6,622 6,921 7,764 8,976
% Growth (1.6%) 0.3% 8.1% 8.5% 10.7% 11.8% 12.7% 12.9% 14.1% 15.3% 16.1% 16.3% (2.5%) 4.5% 12.2% 15.6%
Total Restaurant Costs (968) (1,324) (1,600) (1,764) (1,106) (1,424) (1,767) (1,959) (1,239) (1,605) (2,006) (2,223) (5,610) (5,656) (6,257) (7,074)
Food and Paper (345) (453) (575) (610) (401) (501) (645) (688) (458) (578) (750) (800) (1,919) (1,983) (2,236) (2,585)
Payroll and Employee Benefits (257) (358) (403) (511) (280) (390) (439) (558) (306) (426) (479) (608) (1,432) (1,529) (1,668) (1,819)
Occupancy and Other Operating Expense (366) (513) (622) (644) (425) (532) (683) (714) (476) (602) (777) (815) (2,259) (2,145) (2,354) (2,670)
Restaurant Profit 289 239 398 338 285 324 484 414 348 409 608 537 1,012 1,264 1,507 1,902
% Restaurant Margin 23.0% 15.3% 19.9% 16.1% 20.5% 18.5% 21.5% 17.5% 21.9% 20.3% 23.2% 19.5% 15.3% 18.3% 19.4% 21.2%
Franchise Income 27 31 40 43 30 35 45 49 34 40 52 57 130 141 159 184
Total Operating Costs (62) (127) (121) (154) (99) (121) (156) (172) (112) (140) (182) (197) (502) (464) (548) (631)
Franchise Expense (13) (15) (20) (23) (15) (18) (24) (26) (18) (21) (27) (30) (71) (71) (84) (96)
General and Administrative Expenses (67) (107) (120) (133) (86) (105) (135) (147) (97) (120) (156) (169) (424) (427) (472) (542)
Other Income/expense, net 17 11 22 13 13 13 13 13 13 13 13 13 56 63 51 51
Refranchising Gain, Net 1 1 - - - - - - - - - - 15 2 - -
Closures and Impairment Expenses, Net - (17) (3) (11) (11) (11) (11) (11) (11) (11) (11) (11) (78) (31) (44) (44)
Operating Profit 254 143 317 227 216 237 372 292 270 309 478 397 640 941 1,117 1,455
% Operating Margin 19.8% 9.0% 15.6% 10.6% 15.2% 13.3% 16.2% 12.0% 16.6% 15.1% 17.9% 14.1% 9.5% 13.3% 14.1% 15.9%
Interest Income, Net 2 5 6 - - - - - - - - - 11 13 - -
Change in Fair Value of Financial Instruments - - - - - - - - - - - - 21 - - -
Profit before Tax 256 148 323 227 216 237 372 292 270 309 478 397 672 954 1,117 1,455
Provision for Income Tax (76) (35) (102) (66) (63) (69) (108) (85) (78) (90) (139) (115) (158) (279) (324) (422)
% Effective Tax Rate (29.7%) (23.6%) (31.6%) (29.0%) (29.0%) (29.0%) (29.0%) (29.0%) (29.0%) (29.0%) (29.0%) (29.0%) (23.5%) (29.2%) (29.0%) (29.0%)
Minority Interest (After Tax) 5 6 10 7 7 7 12 9 8 10 15 12 12 28 35 45
Net Income (Loss) 175 107 211 154 146 161 253 198 183 210 325 270 502 647 759 988
% Net Margin 13.6% 6.7% 10.4% 7.2% 10.3% 9.0% 11.0% 8.2% 11.3% 10.2% 12.2% 9.6% 7.4% 9.2% 9.6% 10.8%
Total Revenue 1,284 1,594 2,038 2,146 1,421 1,782 2,296 2,423 1,621 2,054 2,667 2,818 6,752 7,062 7,922 9,160
% Growth (1.5%) 0.4% 8.2% 8.5% 10.7% 11.8% 12.7% 12.9% 14.1% 15.3% 16.1% 16.3% (2.3%) 4.6% 12.2% 15.6%
EBITDA 318 256 425 332 327 348 481 399 385 423 590 507 1,129 1,331 1,555 1,905
% EBITDA Margin 24.8% 16.1% 20.9% 15.5% 23.0% 19.5% 20.9% 16.5% 23.7% 20.6% 22.1% 18.0% 16.7% 18.8% 19.6% 20.8%
17
Balance Sheet and Cash Flow Statement
Balance Sheet
Fiscal Year 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2016 2017 2018 2019
Quarter 1 2 3 4 1 2 3 4 1 2 3 4
Current Assets
Cash and Cash Equivalents 1,074 892 1,477 1,557 1,418 1,763 2,166 2,336 2,207 2,620 3,115 3,356 885 1,557 2,336 3,356
Short-term Investments 180 310 91 91 91 91 91 91 91 91 91 91 79 91 91 91
Accounts Receivable, Net 68 74 81 111 74 92 119 126 84 106 138 146 74 111 126 146
Inventories 231 266 246 289 190 238 306 326 217 274 355 379 268 289 326 379
Prepaid Expenses and Other Current Assets 169 150 159 188 124 156 201 212 142 180 233 246 120 188 212 246
Total Current Assets 1,722 1,692 2,054 2,236 1,897 2,340 2,883 3,090 2,740 3,271 3,933 4,219 1,426 2,236 3,090 4,219
Non Current Assets
Property, Plant and Equipment, Net 1,627 1,617 1,652 1,775 1,755 1,718 1,697 1,832 1,811 1,773 1,751 1,898 1,647 1,775 1,832 1,898
Investment in Unconsolidated Affiliate 37 51 74 74 74 74 74 74 74 74 74 74 71 74 74 74
Deferred Income Taxes 163 166 168 168 168 168 168 168 168 168 168 168 162 168 168 168
Goodw ill 80 103 107 107 107 107 107 107 107 107 107 107 79 107 107 107
Intangible Assets, Net 87 105 104 104 104 104 104 104 104 104 104 104 88 104 104 104
Other Assets 261 287 301 301 301 301 301 301 301 301 301 301 254 301 301 301
Total Assets 3,977 4,021 4,460 4,766 4,406 4,812 5,334 5,676 5,306 5,798 6,438 6,871 3,727 4,766 5,676 6,871
Current Liabilities
Accounts Payable and Other Current Liabilities 984 966 1,120 1,286 806 1,038 1,288 1,428 903 1,170 1,462 1,620 971 1,286 1,428 1,620
Income Taxes Payable 84 36 92 77 51 64 83 87 59 74 96 102 33 77 87 102
Total Current Liabilities 1,068 1,002 1,212 1,363 857 1,102 1,371 1,515 962 1,244 1,558 1,722 1,004 1,363 1,515 1,722
Non Current Liabilities
Capital Lease Obligations 28 27 28 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28 28 28 28
Minority Interest 50 58 70 70.0 70.0 70.0 70.0 70.0 70.0 70.0 70.0 70.0 66 70 70 70
Redeemable Noncontrolling Interests - 5 5 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 - 5 5 5
Other Liabilities and Deferred Credits 251 260 274 274.0 274.0 274.0 274.0 274.0 274.0 274.0 274.0 274.0 252 274 274 274
Total Shareholders Equity 2,580 2,669 2,871 3,025 3,172 3,333 3,586 3,784 3,967 4,177 4,502 4,772 2,377 3,025 3,784 4,772
Total Liabilities & Shareholders Equity 3,977 4,021 4,460 4,766 4,406 4,812 5,334 5,676 5,306 5,798 6,438 6,871 3,727 4,766 5,676 6,871
Cash Flow Statements
Net Income 175 107 211 154 146 161 253 198 183 210 325 270 715 759 988
D&A 64 96 105 94 101 99 97 96 104 103 100 99 411 359 394 406
Increase in NWC 58 (88) 214 49 (306) 147 129 107 (333) 165 148 119 (32) 233 76 99
Cash Flow from Operations 297 (59) 407 479 401 (46) 478 573 488 1,229 1,493
Capex (74) (103) (85) (217) (80) (63) (76) (231) (83) (64) (79) (246) (436) (479) (450) (472)
Net Change in Cash 80 (139) 345 403 170 (129) 414 494 241 778 1,020
DCF Output
Base Case
18
WACC 9.0%
Terminal Grow th Rate 3.0%
Free Cash Flow 2018 2019 2020 2021 2022
Revenue 7,922 9,160 10,637 12,064 13,254
EBITDA 1,555 1,905 2,174 2,442 2,667
EBIT 1,161 1,499 1,768 2,021 2,218
NOPAT 824 1,064 1,255 1,435 1,575
(+): D&A 394 406 406 421 449
(-): Capex (450) (472) (532) (603) (663)
(-): Increase in Net Working Capital 76 99 99 99 99
Free Cash Flow 844 1,096 1,228 1,351 1,460
Discounted FCF 809 963 990 999 990
Terminal Value 25,058
Gordon Grow th Method:
Sum DCF 2018-2022 4,752
PV Terminal Value 16,286
Enterprise Value 21,038
(+): Net Cash 1,477
Equity Value 22,515
Implied Share Price 58.6
Implied 2018 EV / EBITDA 14.5x
Comparable Company Analysis
Source: FactSet
Discount to global QSR brands on lower margin
19
Yum trades in-line with Chinese QSR peers and at a discount to QSR with predominantly US operations
Price 52 Week Market Enterprise EV / EBITDA P / E ROE Net Margin
Company Lcl Low High Cap Value 2018 2019 2018 2019 LTM LTM
Yum China 41.7 25.5 43.5 16,055 14,648 11.1x 10.2x 25.4x 22.7x 23.4% 7.4%
Chinese QSR Companies
Café de Coral 23.8 23.7 28.0 1,786 1,681 11.9x 11.6x 23.1x 22.5x 14.3% 6.4%
Xiabu Xiabu 12.1 4.6 12.9 1,669 1,453 11.7x 10.6x 20.4x 17.5x 23.4% 13.3%
Mean 11.8x 11.1x 21.7x 20.0x 18.9% 9.9%
Median 11.8x 11.1x 21.7x 20.0x 18.9% 9.9%
Asian QSR Companies
Gourmet Master 360.0 215.5 377.5 1,945 1,796 11.4x 9.5x 23.2x 19.0x 21.5% 7.9%
Yoshinoya 1,875.0 1,517.0 2,019.0 1,078 1,166 12.2x 11.4x 51.5x 47.5x 2.2% 0.7%
McDonald's Japan 4,825.0 2,930.0 5,130.0 5,663 5,701 #N/A #N/A 27.3x 34.6x 4.9% 2.4%
Mean 11.8x 10.4x 37.4x 33.2x 11.8% 4.3%
Median 11.8x 10.4x 37.4x 33.2x 11.8% 4.3%
Global QSR
McDonald's 165.6 114.2 170.9 132,006 156,738 15.1x 14.4x 23.6x 21.8x 191.9% 19.0%
Yum Brands 79.6 60.3 81.7 26,821 35,055 17.1x 16.5x 25.1x 21.2x #N/A 15.6%
Domino's Pizza 173.3 153.6 221.6 7,580 9,599 15.1x 13.4x 25.2x 21.4x #N/A 8.7%
Mean 15.8x 14.8x 24.6x 21.5x #N/A 14.4%
Median 16.0x 14.9x 25.0x 21.4x #N/A 12.9%
3.00x
5.00x
7.00x
9.00x
11.00x
13.00x
15.00x
17.00x
Yum China Holdings, Inc. (NYSE:YUMC) - TEV/Forward EBITDA
Café de Coral Holdings Limited (SEHK:341) - TEV/Forward EBITDA
Xiabuxiabu Catering Management (China) Holdings Co., Ltd. (SEHK:520) -TEV/Forward EBITDATsui Wah Holdings Limited (SEHK:1314) - TEV/Forward EBITDA
Forward EV / EBITDA Multiple Evolution
Source: Capital IQ
20
Over the Last Twelve Months
Peer Benchmarking
Source: Company Information
Cost leader with high returns
21
Chinese QSR tends to be more self-owned than franchised
Source: broker research
Concern on food safety, capital market efficiency
22
Share Price Evolution
Source: tmall.com
23
Over the Last Twelve Months
Direct model – owned stores, owned delivery fleet
Case Study: Digital + Delivery reinforce brand equity
Consumers value food safety in delivery
KFC has superb control on labor costs
Own fleet: maximal control over quality… - Unlike other western QSR
brand, KFC delivers 100% with own fleet, all while maintaining lower labor costs due to optimal
- Dedicated team means KFC can enforce stricter control on food quality, turnaround time, and customer satisfaction, all of which rank highly on delivery preferences
- Also helps collect big data on consumer preference, giving KFC an edge in strategically locating new stores in new cities
Delivery important to company sale
Source: company information, broker research
24
Case Study: Digital enables new growth area
Fast food bento on high-speed rail
- In July 2017, China Railway High-speed began allowing passengers to pre-book meals online from select external food vendors. Only approved brands will be allowed to list their products on the website and app, and will be subject to food safety supervision by railway authorities
- KFC also has physical stores in 250 high-traffic transport hubs (20 high-speed rail stations) with plans for expansion
- Brand new growth area with HSR becoming dominant mode of transportation and limited # of competitors
City rail transit: number of stations
Building more high speed trail stations
Source: China Railway Corp, broker research
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T-mall and Ant Financial (Alibaba’s eCommerce & Financial Arms)
KFC partner with Alibaba and open store in T-mall (B2C platform)
Partner with T-mall (the only chain store one T-mall) to drive gift card and cashless payment service$460 million into Yum China. Mobile payment represented 45% of our company sales with other cashless payment as another 15% of sales (Gift card).
Cashless payment reached a record of $1.2 billion in Q3, which is more than 60% of our company’s sales I believe, China is the leader in the world in cashless sales and our company is one of the leaders in China.
Ant Financial Services Group is an online payment services provider. Its platform, Alipay, is the world's largest mobile and online payments platform. Ant Financial, alongside key Alibaba investor Primavera Capital, is investing a total of $460 million in Yum China.
Source: tmall.com
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Management Team
Ms. Joey Wat is re-designated as President, Chief Executive Officer, Chief Operating Officer, Director of the Company effective March 1, 2018. She has served as the President and Chief Operating Officer of Yum China since February 2017. She served as Chief Executive Officer, KFC from October 2016 to February 2017, a position she held at Yum! Restaurants China from August 2015 to October 2016. Ms. Wat joined Yum! Restaurants China in September 2014 as President of KFC China and was promoted to Chief Executive Officer for KFC China in August 2015.
Mr. Johnson Huang is the General Manager - KFC of the Company. Mr. Huang served as the Chief Information and Marketing Support Officer of the Company from October 2016 to February 2017, a position he held at Yum! Restaurants China from December 2014 to October 2016. Mr. Huang joined YUM in 2006 to lead the information technology department in China, and was named Chief Information Officer in 2013. He became our Chief Information and Marketing Support Officer in 2014 and assumed oversight of a spectrum of functions including IT, Digital, DSC, Marketing Shared Services and Engineering. He has been the key architect of Yum! Restaurants China’s digital strategy and information technology roadmap in China.
Mr. Peter Kao is the General Manager - Pizza Hut Casual Dining of the Company. He has served as the General Manager, Pizza Hut Casual Dining since March 2017. He served as Chief Executive Officer, Pizza Hut Casual Dining from October 2016 to March 2017, a position he held at Yum! Restaurants China from August 2015 to October 2016. Mr. Kao previously served in the position of Senior Vice President & Brand General Manager of Pizza Hut for Yum! Restaurants China starting in 2013 and began leading both Pizza Hut Casual Dining and Pizza Hut Home Service as Brand General Manager in 2008. Mr. Kao has had several leadership positions at YUM, responsible for both Pizza Hut Casual Dining and Pizza Hut Home Service, since 2008.
Experienced local management team; stock price outperform
YUMC outperform S&P 500 and S&P 500 Restaurant since spin-offSource: company information, FactSet
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SSSg volatility due to one-off events
Food quality scandal in 2012 and 2014
YUMC’s heavily impacted by food safety incident and US-Sino relationship
A 2014 food safety scandal in China did major damage to the reputations of fast food giants McDonald's and KFC. Yum immediately terminated its global relationship with OSI, which was not a major supplier to the company.
“After an undercover local TV report that alleged workers at Shanghai Husi Food Co Ltd used expired meat and doctored food production dates, regulators closed the factory on July 20. The plant is part of OSI Group LLC [OSIGP.UL], a U.S. food supplier.
OSI, which has close to 60 manufacturing facilities worldwide and had revenue of more than $5 billion in 2012, has been supplying McDonald’s in China since 1992 and KFC and Pizza Hut parent Yum since 2008, according to its website.” - Reuters
Since then, YUMC developed comprehensive process to prevent future food scandals and tightened the supplier selection.
Source: company information
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YUM and YUMC - Company History
As of end of 2016, *WCDR - Western Casual Dining Restaurant
Source: company information
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Pizza Hut - Concept stores (PH+) and remodel current stores
Pizza Hut's First Robot Restaurant (PH+) Opened in Shanghai
Source: company information
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KFC - K PRO Healthy Eating Concept
YUMC announced on Sep 1, 2017 that it has launched a new restaurant – KPRO in Hangzhou, China.
- Integration of Alipay's new "Smile to Pay" facial recognition payment solution
- Offer a fresh, seasonal menu to a new generation of sophisticated diners
Source: company information
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Chinese yuan strength against the U.S. dollar
1Yr - CNY to USD Chart