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3 Reasons China's KFC and Pizza Hut Franchisee Is a Buy For 2021

By Nicholas Rossolillo - Feb 11, 2021 at 8:30AM

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Yum China is back in growth mode and about to lap results from a forgettable 2020.

Yum China (YUMC 4.11%) -- franchisee of KFC, Pizza Hut, and Taco Bell from Yum! Brands (YUM 0.26%) in mainland China -- made lots of positive progress to close out 2020. Sales were back in year-over-year growth mode (up 11% to $2.26 billion), and adjusted net income was up 56% to $153 million (or up 76% when excluding Yum China's investment gains on Chinese delivery leader Meituan-Dianping (MPNG.Y 3.67%)).  

China's leading restaurant operator is about to start lapping results that were deeply affected by COVID-19 a year ago, so though share prices are up 39% over the last 12-month stretch, they look like a pretty good value. Here are three reasons why I think so.  

1. 2020 sales were a drag

Yum China's full-year 2020 financial results ended up being pretty decent, especially considering the economic lockdown it endured this time a year ago. The company's roots in online ordering and delivery and lots of new store openings were key here (more on both those topics later). 

Metric

2020

2019

Change

Revenue

$8.26 billion

$8.78 billion

(6%)

Restaurant margin

14.9%

16%

(1.1 pp)

Adjusted net income

$615 million

$729 million

(16%)

Pp = percentage point. Data source: Yum China.  

Bear in mind the above results include the first quarter of last year, a period in which Yum China reported a 24% year-over-year sales decline. That forgettable quarter is about to get lapped, which will provide upward lift for the company's revenue and profit results. Trading for 30 times trailing 12-month earnings, the stock thus looks like a pretty reasonable value to me.

Someone pictured offscreen ordering pizza on a tablet.

Image source: Getty Images.

2. Lots of new stores

Yum China reported having 10,506 restaurants in operation at the end of 2020, up from 9,200 at the end of 2019. That's an impressive figure given events last year, and solid progress toward Yum China's long-term goal of having 20,000 stores in mainland China. About 1,000 more stores are in the works for 2021.

However, of the total, almost 7,200 of those stores are KFC and over 2,300 are Pizza Hut. Taco Bell could be another long-term generator of store growth for Yum China. The same goes for the company's wholly owned brands (the ones it doesn't license from former parent company Yum! Brands) like Little Sheep, Huang Ji Huang, and East Dawning. And as China embraces coffee culture, Yum China's COFFii & JOY company and a partnership with Italian coffee giant Lavazza hold plenty of promise, too.  

Rebounding same-store sales (a blend of foot traffic and average guest order size) at existing restaurants will be a key metric to monitor in the year ahead, but don't underestimate the long-term potential of Yum China's own portfolio of restaurant names. 

3. The largest rewards program you've never heard of

In the new digital era that is emerging, restaurants are in need of adaptation. Online ordering and delivery is more important than ever before. But Yum China is already a global leader in these departments.

Case in point: 80% of the company's orders were made digitally in 2020. That's right, online, mobile, and app-based sales were by far in the majority at Yum China, a figure that continues to rise even as effects of the pandemic wane (the rate was 83% in the fourth quarter). Orders for delivery were also 30% of Yum China's business in 2020, an incredibly high figure when comparing the company to its peers in the U.S. Many of the locations Yum China operates would more closely resemble a ghost kitchen -- a highly profitable store that caters to delivery with no space (and no need for staff) for in-store dining.  

Here's another mind-boggling statistic: Yum China said its total rewards members (mostly made up of KFC and Pizza Hut app users) were more than 300 million at the end of 2020, up from over 240 million a year ago. A group nearly as big as the entire population of the U.S. has signed up for rewards via an app for this restaurant giant in mainland China. That is an incredible figure and underscores this company's know-how in navigating the digital age.  

Yum China is well entrenched in the Middle Kingdom, is returning to steady growth, and has massive potential as the country's middle class continues to develop. This stock looks like a long-term bargain. I remain a buyer of this top restaurant name after the final report card of 2020.

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Stocks Mentioned

Yum China Holdings, Inc. Stock Quote
Yum China Holdings, Inc.
YUMC
$41.07 (4.11%) $1.62
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$112.47 (0.26%) $0.29
Meituan Dianping Stock Quote
Meituan Dianping
MPNG.Y
$44.01 (3.67%) $1.56

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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