EB SECURITIES: YUM CHINA (09987) Accelerates Store Openings, Profit Margin Continues to Improve; Maintains "Buy" Rating

EB SECURITIES issued a research report maintaining its 2026-2028 net profit attributable to parent forecasts for YUM CHINA (09987) at US$1.027 billion/US$1.109 billion/US$1.183 billion, equivalent to 2026-2028 EPS of US$3.04/US$3.28/US$3.50, respectively. The current share price corresponds to 2026-2028 PE of 16x/15x/14x. The company is a leading Western fast-food enterprise with strong digitalization and supply chain capabilities, and its two core brands still have certain growth room in channel penetration. The "Buy" rating is maintained. EB SECURITIES' main views are as follows: Event: In 26Q3, YUM CHINA achieved revenue of US$3.477 billion, +8% YoY (or +2% excluding the impact of foreign currency translation); operating profit of US$451 million, +13% YoY (or +6% excluding the impact of foreign currency translation); net profit attributable to parent of US$311 million, +10% YoY; operating margin of 13.0%, +0.5pcts YoY, rising for the tenth consecutive quarter. Same-store sales came under short-term pressure, with operating performance improving marginally in September. 1) Same-store sales: In 26Q3, overall same-store sales were -3% YoY, mainly affected by the high base formed by delivery platform subsidies in the same period last year and unfavorable weather in August; the same-store sales index improved sequentially in September; same-store transaction volume was +3% YoY, growing for the fifteenth consecutive quarter. By brand, KFC same-store sales were -3% YoY, transaction volume +3% YoY, and average ticket -5% YoY; Pizza Hut same-store sales were -3% YoY, transaction volume +5% YoY, and average ticket -8% YoY, with an increase in small-ticket orders and the value-for-money strategy continuing to drive traffic. 2) Delivery business: In 26Q3, delivery sales were +7% YoY, with growth slowing somewhat due to the pullback in platform subsidies. Delivery accounted for 54% of restaurant revenue, +3pcts YoY and flat QoQ; delivery accounted for 54% and 53% at KFC and Pizza Hut, respectively. The company attracted customers back to stores through dine-in exclusive offers, in-store experience, and takeaway convenience, with dine-in and takeaway performance improving sequentially. 3) Store expansion: In 26Q3, a net 692 stores were added, a record high for a single quarter, of which franchise stores accounted for 44%; KFC and Pizza Hut added a net 518 and 191 stores, respectively. As of the end of September, total stores were 19,989, including 14,307 KFC and 4,740 Pizza Hut. The company raised its full-year net new store target to more than 2,400, with a year-end total store target of more than 20,500, and targets franchise stores at 40%-50% of KFC and Pizza Hut net new stores. More than half of new stores are located in Shenzhen New Land Tool Planning & Architectural Design, special channels, or trade areas not yet covered by dine-in and delivery, to reduce cannibalization of existing stores; flexible store formats such as KFC town stores, Pizza Hut WOW, and twin Gemini side-by-side stores, combined with customized menus for lower-tier markets, enhance channel penetration adaptability. Operating margin rose for the tenth consecutive quarter, and the benefits of the Pizza Hut brand acquisition began to be released. 1) Profitability: In 26Q3, overall restaurant margin was 17.8%, +0.5pcts YoY, mainly thanks to operational streamlining and favorable raw material prices, offsetting cost pressure from value-for-money products, declining same-store sales, and a higher delivery mix; savings on Pizza Hut franchise fees also contributed incremental profit. By brand, in 26Q3 KFC restaurant margin was 18.6%, +0.1pcts YoY; Pizza Hut restaurant margin was 15.3%, +1.9pcts YoY. The company completed the acquisition of ownership of the Pizza Hut mainland China brand on August 7, eliminating brand franchise fees, which, combined with operational streamlining and automation, drove Pizza Hut profitability improvement. 2) Shareholder returns: In 26Q3, the company returned US$362 million to shareholders, including US$263 million in share repurchases and US$99 million in cash dividends, with the full-year target of US$1.5 billion in returns unchanged. In November, the board approved an increase of US$1 billion in share repurchase authorization, bringing remaining authorization to approximately US$1.3 billion; it also declared a cash dividend of US$0.29 per share, expected to be paid on December 22. Starting in 2027, the company plans to return approximately 100% of free cash flow to shareholders after deducting dividends to minority shareholders of subsidiaries, with average annual returns of US$900 million to more than US$1 billion expected in 2027-2028, and returns exceeding US$1 billion in 2028. New businesses are expanding rapidly, with model innovation continuing to contribute incremental growth. 1) KCOFFEE: As of the end of 26Q3, there were more than 4,000 stores, with a target of more than 5,000 by 2027; during the summer peak, apple sparkling Americano weekly sales exceeded 1 million cups, and non-coffee beverage sales in Q3 more than doubled YoY, with beverage category expansion continuing to enrich consumption scenarios. 2) KPRO: As of the end of 26Q3, there were more than 700 stores covering about 250 cities, with sales and profit performance better than the internal model; the target is to increase to more than 850 by the end of 2026 and 1,500 by 2027. 3) Pizza Hut Burgers: The burger module has been expanded to more than 300 stores covering 50 cities, bringing double-digit sales growth and considerable profit contribution to parent stores, with targets of more than 500 stores in 2026 and more than 1,000 in 2027; the Pizza Hut burger category's 2026 sales target is to exceed RMB1 billion. 4) "Speed Pickup" service: It has covered more than 9,000 KFC stores, with a 2026 target of more than 10,000 stores and RMB1 billion in sales; the convenient experience is expected to drive takeaway business growth. Looking ahead, channel penetration, category expansion, and cost optimization will jointly support medium-term growth, and the benefits of the brand acquisition are expected to be gradually released.