Huachuang Securities: Maintaining Yum China's (09987) “Recommended” Rating Target Price of HK$481.93, third quarter operating profit increased 13% year-on-year

The Zhitong Finance App learned that Huachuang Securities released a research report stating that it maintains the “recommended” rating of Yum China (09987), refers to comparable company valuations, and gives a price-earnings ratio (PE) of 18 times in 2027, corresponding to a target price of HK$481.93. The bank estimates that the company's net profit from 2026 to 2028 will be $1,044 billion, $1.152 billion and $1.23 billion, respectively. The company achieved revenue of US$3.477 billion in the third quarter of 2026, up 8% year on year; operating profit of US$451 million, up 13% year on year; and net profit to mother of US$311 million, up 10% year on year. The bank believes that the company will improve profit margins by improving operational efficiency and saving costs through Pizza Hut brand acquisitions, and provide growth support by opening stores and expanding diversified business formats.

The main views of Huachuang Securities are as follows:

The same store is under pressure in the short term, and profit margins continue to rise

In the first three quarters of 2026, the company achieved revenue of US$9.886 billion, up 10% year on year; operating profit of US$1,246 million, up 13% year on year; and net profit to mother of US$864 million, up 10% year on year.

In the third quarter of 2026, the company's system sales increased 3% year on year, and same-store sales fell 3% year on year, mainly affected by the high takeout platform subsidy base for the same period last year and unfavorable weather in August; same-store transaction volume increased 3% year on year, increasing for the 15th consecutive quarter.

In terms of profitability, the restaurant's profit margin was 17.8%, up 0.5 percentage points from the previous year; the operating profit margin was 13.0%, up 0.5 percentage points from the previous year, for the 10th consecutive quarter. Streamlined operations, favorable raw material prices, and Pizza Hut brand franchise fee savings have offset the pressure of declining same-store sales, cost-effective products, and increased rider costs.

KFC's trading volume continues to grow, and profitability remains resilient

In the third quarter of 2026, KFC system sales increased 3% year on year, and same-store sales fell 3% year on year. Among them, same-store transaction volume increased 3% year on year, and the customer unit price was 36 yuan. New scenarios such as Kenyue Coffee and KPRO continued to bring in small incremental orders. The restaurant's profit margin was 18.6%, an increase of 0.1 percentage points over the previous year.

In the third quarter, KFC added a net of 518 new stores. Franchise stores accounted for 52% of the new stores, and the total number of stores reached 14,307. Kenyue Coffee has surpassed 4,000, KPRO has more than 700, and express delivery has covered more than 9,000 stores, and diverse consumption scenarios continue to expand.

Savings from the Pizza Hut brand acquisition have begun to be realized, and profit margins have improved significantly

In the third quarter of 2026, Pizza Hut system sales increased 1% year on year, and same-store sales fell 3% year on year. Among them, same-store transaction volume increased 5% year on year, increasing for the 15th consecutive quarter; the customer unit price was 65 yuan, and the mass market and one-person meal strategy continued to advance.

Pizza Hut's profit margin was 15.3%, up 1.9 percentage points year on year; operating profit margin was 11.0%, up 2.1 percentage points year over year. The company completed the acquisition of the Pizza Hut brand ownership in mainland China on August 7. Franchise fee savings combined with operational efficiency boosting profitability.

Pizza Hut added a net of 191 new stores in the third quarter. Franchise stores accounted for 48% of the new stores, bringing the total number of stores to 4,740. The Pizza Hut Burger module covers more than 300 stores, bringing double-digit sales growth and incremental profits to the parent store.

The target for opening stores for the whole year was raised, and shareholder returns continued

In the third quarter of 2026, the company added 692 new stores, a record high in a single quarter, and the total number of stores reached 19,989. The company raised its annual store target to more than 20,500, and added 2,400 new stores for the whole year.

In terms of shareholder returns, the company gave back US$362 million to shareholders in the third quarter, including US$263 million in stock repurchases and US$99 million in cash dividends; the cumulative return for the first three quarters was US$1,080 million, and the annual return target of US$1.5 billion remained unchanged.

Starting in 2027, the company plans to return approximately 100% of its free cash flow to shareholders after deducting dividends from minority shareholders of subsidiaries. It is expected to return an average annual return of 900 million to 1 billion US dollars from 2027 to 2028, and exceed 1 billion US dollars in 2028.

Risk Alerts

Competition in the industry has intensified; costs have risen sharply; food safety risks; expansion falls short of expectations, etc.