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Yum China Stock: 20.4% Yield Potential with Recovery and Expansion

Company Name: Yum China Holdings Inc.
Ticker: YUMC.US
Entry Price: $54
Target Price: $65
Projected Yield: 20.4%
Time Line: 3 to 6 months
Risk: Average

About Yum China Holdings

Yum China is the largest fast food restaurant chain in China, being also formerly a division of Yum! Brands, a US based corporation. In 2016, it became an independent public company. Despite being separated from Yum! Brands, the company still formally remains a US based one. Yum China Holdings manages more than 9,900 restaurants under the following brands: KFC, Pizza Hut, Taco Bell, East Dawning, Little Sheep, and COFFii & JOY, which cover 1,400 cities in all China provinces.

What's the Idea?

Capitalize on a stock that can rise with post-COVID-19 recovery, the expansion, and the development of web network.

Buy Yum China Holdings Shares >>

Why Trade Yum China Holdings? 

Reason 1: Recovery in China and Chain Expansion

The restaurant industry was among the most affected ones by COVID-19. However, Yum China Holdings was able to quickly get back to the previous sales figures. The entire chain is located only in China, the country that began lifting restrictions and demonstrating an increase in economic activity earlier than others. Thanks to this, almost all Yum China establishments had reopened by late July, and the company's revenue in Q2 2020 reached 93% of last year. Yum China considers the lack of travel opportunities to be one of the latest challenges on the road to full recovery, as many KFC and Pizza Hut establishments are located in train stations and airports.

The current economic situation did not stop Yum China from expanding its network to reach its goal of 20,000 restaurants across the country. Yum China acquired Huang Ji Huang and opened 169 new establishments in Q2 2020, most of the new ones being KFC. The new brands are also being developed: Taco Bell is opening restaurants outside Shanghai, e.g. in Shenzhen and Beijing, while COFFii & Joi growth is good for the long term. Yum China sees the current economic situation as an opportunity to increase its presence and market share, while the competition is facing issues and trying to resolve them.

Reason 2: Web Network and Delivery Expansion

An additional advantage of Yum China is its web and delivery network. KFC and Pizza Hut platforms are very much popular, with the number of registered users having reached 265M. In Q2 2020, the online orders share was 80%, while the volume of delivered and takeaway orders exceeded 50% of all orders. With an opportunity to order on the web, the company was able to maintain the number of orders and keep the customer loyalty high.

A developed digital infrastructure is not only an additional sales expansion channel, but also a tool for hypothesis testing and analytics to determine the success of promotions and the popularity of new products. The company plans to continue expanding its digital business to improve marketing efficiency and optimize operating activities. In the midterm, this strategy will help increase sales and business margin.

Reason 3: Bringing In Vegetable Meat Products

Recently, products with plant-based meat are gaining popularity. This is confirmed with the growth of sales of Beyond Meat and the intention of large manufacturers to take over this niche. Yum China plans to take advantage of the increasing popularity of artificial meat, too: in June, the company started working with Beyond Meat, one of the leaders in this area.

Last quarter, the company performed a test launch of its products, which proved to be successful. In KFC, Pizza Hut, and Taco Bell, all plant-based meat products were sold out within days. This might prove to be an additional growth driver in the coming years if Yum China establishes supplies with its partner.

Reason 4: Stable Financial Conditions

Yum China posted moderate results in Q2 2020 compared to the competition. As such, the earnings were down 11% YoY and reached $1.90B (7% excluding exchange rates). Adjusted operating income declined by 36% (33% excluding foreign currency) to $132M, while adjusted earnings per share fell by 24% to $0.35. Despite the pandemic, however, the company is still profitable and has no liquidity problems. Since early 2020, the company's free cash flow amounted to $265M.

Yum China has a solid financial condition, with the debt obligations amounting to $24M, and the cash equivalents being at $1.70B. In addition, the company has temporarily suspended dividend payments and share buyouts, with the remaining buyout amount of $692M.

Under these conditions, Yum China has excellent opportunities for further business development, as it plans to open 800 to 850 new establishments by late 2020. Yum China stock price is quite acceptable, with EV/S, EV/EBITDA, and PE ratios being 2.20, 10.20, and 29.30, respectively, which is comparable to the industry average.

How to Use the Idea

  1. Buy Yum China Holdings stock at $54.
  2. Allocate no more than 2% to 3% of your portfolio amount. To build a balanced portfolio, you can use our analysts' recommendations for an USD or a EUR portfolio.
  3. Sell the stock when the price is at $65 per share.

How to Buy Yum China Holdings Shares?

If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.

After opening an account, you can buy shares in either of the following ways:

Freedom24 Web Platform: In the Web Terminal section, type YUMC.US (Yum China Holdings ticker in the NYSE) in the search box, and select Yum China Holdings Inc. in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.

Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type YUMC.US (Yum China Holdings ticker in the NYSE), and select Yum China Holdings Inc. in the results. You will then see Yum China Holdings stock in the market watch; tap it and go to the Order tab in the dialog that will show up. Specify the number of shares you want to buy and click Buy.

Buy Yum China Holdings Stock, don't miss the recovery of the largest fast food market!

Buy Yum China Holdings Shares >>

*Additional information is available upon request. Investment in securities and other financial instruments always involves risks of capital loss. The Client should make himself aware at his own accord, including to familiarize himself with Risk Disclosure Notice. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Commissions, fees or other charges can diminish financial returns. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and do not constitute an investment advice service. The recipient of this report must make their own independent decisions regarding any securities or financial instruments mentioned herein. Information has been obtained from sources believed to be reliable by Freedom Finance Cyprus Ltd or its affiliates and/or subsidiaries (collectively Freedom Finance). Freedom Finance do not warrant its completeness or accuracy except with respect to any disclosures relative to the Freedom Finance and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated.