CALL DETAILS:
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Yum China (YUMC) Long Thesis:
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Hedgeye Macro – China In Quad 2: In the Hedgeye Quad framework, China is in #Quad2 which is bullish for stocks like YUMC. With this as a macro framework and our in-house expert on China, Felix Wang, believes China is on the road to recovery. YUMC has been hit hard since the beginning of COVID but a positive macro backdrop with the pandemic hopefully coming to an end gives us a great entry point and is bullish for YUMC financials.
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KFC and Technology Drive Growth: KFC is a powerhouse brand globally and is a dominant brand in China. KFC appeals to Chinese consumers by adapting its menu to local tastes and has a strong new product pipeline. As of the end of 1Q22, KFC had over 8,100 outlets across 1,600 Chinese cities. The power of the brands has attracted over 345 million members. Members accounted for over 60% of sales, with digital representing 88% of sales. The YUMC digital platform is one of the best in the world and is an important platform for incremental growth.
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Pre-Announced Horrible 2Q22 Results – Will it be the last? The Omicron variant caused significant volatility in the company’s business operations in 1Q22. In March 2022, over 1,700 of their stores were temporarily closed or offered only takeaway and/or delivery services. Same-store sales in March decreased by more than 20% and as a result, the company incurred an operating loss in March. The financials of YUMC have been devastated over the past few years but will still generate over $1.4B in EBITDA in 2022, with 2023 indicating signs of growth and a return to profitability.
