YUM China: Driven by dual engines of operational efficiency and innovation, Q3 core operating profit increased by 18%

On November 4th, YUM China (09987) released an unexpectedly strong Q3 2024 earnings report. Driven by robust performance growth and a $4.5 billion shareholder return plan, YUM China's stock price in the U.S. surged over 11% at its peak during intraday trading on November 4th. On November 5th, YUM China's Hong Kong stock opened significantly higher and briefly surpassed HKD 388 during the day.

Record High Revenue in Q3, Core Operating Profit Up 18%

The financial report shows that in Q3 2024, YUM China achieved a 5% year-on-year revenue growth, reaching $3.07 billion, setting a new quarterly historical high. Benefiting from sales growth from new stores, system sales increased by 4% year-on-year; core operating profit rose by 18% year-on-year, and the operating profit margin increased by 100 basis points to 12.1%, significantly exceeding market expectations. As of Q3, YUM China has achieved positive same-store traffic growth for seven consecutive quarters.

According to observations from the Zhitong Finance APP, YUM China has demonstrated strong growth momentum amid the uncertainty of the current economic environment, primarily driven by the company's dual engines of operational efficiency and innovation. During the reporting period, YUM China simplified, centralized, and automated key processes to lighten the burden on restaurant managers and enhance efficiency. The company adheres to the strategy of "best in class, best price," optimizing product design to improve ingredient usage and operational efficiency.

In Q3, YUM China's takeout sales grew by 18% year-on-year, continuing a decade-long trend of double-digit annual growth. By optimizing its takeout strategy and increasing small order volumes, the company attracted additional traffic and gained a larger market share on takeout platforms. In Q3, the takeout revenue from KFC and Pizza Hut accounted for approximately 40% of their restaurant revenue.

At the same time, YUM China's innovation in its business model has also become a driving force for creating new growth curves. In the first three quarters of 2024, KFC sold nearly 200 million cups of coffee, surpassing the total sales for the entire year of 2023. KFC's K Coffee, known for its high cost-performance ratio and innovative beverage menu, has gained consumer favor, with the number of K Coffee stores reaching 500 and expected to exceed 600 by the end of the year.

The innovative Pizza Hut WOW stores have also increased from 5 in May to 150 currently. With an average price of 30 to 40 RMB per person and the convenience of made-to-order service, these stores have attracted more customers, showing excellent dine-in performance and significant same-store growth. Since its launch, this new model has covered more than ten provinces and cities, demonstrating strong growth potential.

Business Landscape Continues to Expand, Opening Up Broad Growth Space

The above data demonstrates YUM China's flexibility and innovative capability in adapting to changes in consumer habits and market trends. Gaining long-term recognition from consumers is the cornerstone of YUM China's continuous expansion of its business scale and sustainable performance growth The Zhitong Finance APP noted that in recent years, YUM China has maintained a strong pace of store expansion. As of September 30, the total number of YUM China stores reached 15,861, with a net increase of 438 stores in the third quarter, of which the proportion of franchised stores rose to 33%. Meanwhile, new stores continue to perform well, with KFC maintaining an investment payback period of 2 years and Pizza Hut also maintaining a payback period of 2 to 3 years. Among the new stores opened in the past two years, about 80% achieved profitability within three months of opening.

In the future, YUM China will further accelerate the development of franchised stores. YUM China's CEO, Joey Wat, stated that the company has identified significant potential in exploring untapped markets and expanding consumer reach in the Chinese market. Through customized store models, YUM China is speeding up the expansion of franchised stores to capture additional market opportunities. Franchised stores enable the company to enter previously hard-to-reach strategic locations, remote areas, and lower-tier cities. It is expected that in the coming years, the proportion of franchised stores among KFC's net new stores will gradually increase to 40% to 50%, while for Pizza Hut it will rise to 20% to 30%.

Looking ahead, YUM China remains confident in the potential for future development in China and aims to maintain an annual net increase of 1,500 to 1,700 stores, with capital expenditures between $700 million and $850 million.

Significantly Increasing Shareholder Returns, Demonstrating Long-term Growth Confidence

The Zhitong Finance APP noted that YUM China's store expansion strategy has not only accelerated the company's market penetration but also brought new growth momentum. In this process, YUM China’s emphasis on shareholder returns is also continuously increasing.

YUM China announced a new shareholder return plan in its third-quarter report, stating that between 2024 and 2026, it will increase the funds allocated for stock buybacks and dividends to $4.5 billion, a 50% increase from the previously announced $3 billion plan.

As the largest restaurant company in China, YUM China has delivered over $4 billion in cumulative shareholder returns since its first listing in the United States in 2016. In the first nine months of 2024, the company has returned $1.24 billion to shareholders, nearly three times the amount from the same period last year. This year, YUM China has repurchased about 7% of its shares through "cancellation-style buybacks," which helps enhance the earnings per share for shareholders. In the third quarter, YUM China's diluted earnings per share grew by 33% year-on-year, exceeding the 22% year-on-year increase in net profit.

YUM China's acting CFO, Ding Xiao, stated that based on the company's healthy cash flow, it is confident in balancing investments in business development with good returns for shareholders, through buybacks, dividends, and other means.

In summary, YUM China's growth story is based on the company's keen capture of market opportunities and deep understanding of consumer demand. Through innovative business models, efficient operational strategies, and proactive store expansion plans, the company has achieved counter-cyclical growth in a challenging economic environment. YUM China's growth strategy reflects its optimistic outlook on the long-term development prospects of the Chinese market and its emphasis on shareholder value. As the growth plan continues to advance, YUM China is expected to further solidify its market leadership position and create greater investment returns for investors while achieving long-term sustainable growth