Morningstar: Acquiring Pizza Hut in the mainland may be beneficial for Yum China (09987), with a fair value of HK$600.

Morningstar released a research report stating that it has raised the fair value of YUM CHINA (09987, YUMC.US) American stock's fair value per share by 1% to $77, while giving a fair value of 600 Hong Kong dollars for the Hong Kong stock. Currently, the stock price of the American stock is around $45, which is still severely undervalued. The P/E ratio is forecasted to be 13 times for 2027, and the management has committed to returning 100% of the free cash flow to shareholders. YUM CHINA has signed a final agreement with Yum! Brands (YUM.US) to acquire the ownership of the Pizza Hut brand in China for $1.2 billion in cash. After the transaction is completed, YUM CHINA will not have to pay any franchise fees to Yum! Brands. The transaction is expected to be completed in the third quarter of 2026. The bank believes that the acquisition price of $1.2 billion is attractive compared to the basic economic conditions and growth potential of Pizza Hut China. Just from the factor of saving franchise fees alone, this transaction can increase the company's valuation. The increase in strategic flexibility brings additional growth potential. The $1.2 billion paid by YUM CHINA is about 20 times the savings of franchise fees in 2025, lower than the 25 times P/E ratio estimated based on fair value. Strategic flexibility is a larger long-term benefit. Full ownership will enable YUM CHINA to roll out menu innovations, new store models, and IP collaboration projects faster, align better with consumer trends, and promote sales growth.