EB Securities: Maintains a "buy" rating for YUM CHINA (09987), with growth potential in performance expected until 2024.

EB SECURITIES released a research report stating that it maintains a "buy" rating for YUM CHINA (09987), and has adjusted the 2024-2025 net profit forecast to $915 million and $1.02 billion, respectively. It has introduced a 2026 net profit forecast of $1.135 billion, equivalent to EPS of $2.25, $2.51, and $2.79 respectively. KFC and Pizza Hut still have a certain growth space in channel sinking, and the small store model helps better sinking; the coffee business is booming and is expected to bring new growth momentum to the company. Event: The company released its 2023 annual report, reporting a revenue of $10.98 billion, a year-on-year increase of 15% (or 21% growth calculated at a fixed exchange rate); achieving an operating profit of $1.1 billion, a year-on-year increase of 76%, with core operating profit increasing by 79% year-on-year. In Q4 of 23, the company achieved a revenue of $2.49 billion, a year-on-year increase of 19% (or 21% growth calculated at a fixed exchange rate); achieving an operating profit of $110 million, a year-on-year increase of 170%, with core operating profit increasing by 324% year-on-year. The main points of the report are as follows: Q4 saw a rapid growth in customer traffic, driving good growth in same-store sales. In terms of store operations, in Q4 of 23, system sales were up 21% year-on-year (KFC/Pizza Hut up 20%/24% respectively); same-store sales were up 4% year-on-year (KFC/Pizza Hut up 3%/6% respectively), despite a significant decrease in average spending (KFC/Pizza Hut average spending down 11%/-8% respectively), but customer traffic grew rapidly (KFC/Pizza Hut customer traffic up 16%/15% respectively). In terms of store openings, the company added a net of 1,697 stores in 2023 and a net of 542 stores in 2304 (KFC/Pizza Hut added 379/110 stores respectively), with KFC opening stores at a faster pace than in Q3 of 23; the total number of restaurants at the end of the period was 14,644 (KFC/Pizza Hut had 10,296/3,312 stores respectively), exceeding the target of adding 1,400 to 1,600 stores in 2023. Regarding guidance, the target for adding net new stores in 2024 has been raised to 1,500-1,700, while still maintaining the goal of reaching a total of 20,000 stores by 2026. In 2024, shareholder returns will be further increased, and performance still has growth potential. In 23, the company returned $833 million to shareholders through repurchases and dividends, a year-on-year increase of 25%; among which, about $390 million was returned to shareholders in Q4 of 23, reaching a historical high. By the end of 23, the company still had about $1.5 billion in repurchase authorization available for future stock repurchases. In 2024, the company plans to further increase shareholder returns, repurchasing $1.25 billion in common stock in 24 and paying a cash dividend of $0.16 per share in March. In Q4 of 23, same-store revenue recovered to around 85% of the level in the same period of 19. Looking at a monthly basis, benefiting from demand recovery and new products and activities (KFC's celebration of the tenth anniversary), November to December of 23 showed improvement compared to October, with a noticeable recovery in customer traffic. The Lunar New Year period is a peak season for YUM CHINA sales, and both KFC and Pizza Hut will continue to drive customer traffic through new products and activities (lucky bucket). Although the profit in Q1 of 24 will face a high base, the company is still expected to maintain a flat year-on-year core operating profit margin. Against the backdrop of pressure in the current external environment, we believe that the company, as a leader in the industry, has strong risk resistance capabilities and a strong willingness for dividends/share buybacks (with 24 expected to complete half of the previously proposed $3 billion shareholder return target), and we recommend close attention. Risk warning: repeated risks of epidemics, food safety risks, exchange rate fluctuation risks. Public Account: EBoversea