Yum China offers defensive growth and attractive value

In episode three of our fortnightly COVID-19 webinar series, portfolio manager Sunny Bangia and Jacob Mitchell discuss Chinese retail and the secular trends being accelerated by the coronavirus pandemic. 

As the pandemic approaches a recovery phase in China, defensive investment opportunities are emerging within consumer incumbents. Antipodes believes Yum China Holdings Inc, which operates China’s leading restaurant brands, including KFC and Pizza Hut, and control their distribution network, offers a compelling opportunity. 

Sunny Bangia discusses the business in this webinar highlight. 

This webinar was recorded on 23 April, 2020. To view the full webinar, including further analysis on Yum China, click here.

You can register for upcoming webinars in the series here.

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Episode 3 Part 3 – Transcript:

Sunny Bangia:

Yum China Holdings Inc is effectively the KFC and Pizza Hut brands of China. This company was spun out, IPO’d, in 2016 from Yum! Brands. But operationally, Yum China has been independently run – the management team sit in Shanghai, they make all the capital allocation decisions independent of the US parent and they’ve operated that way for decades. 

Yum China has grown to become the largest QSR (quick-service restaurant) operator in China over the last 30 years, so they’ve got significant scale over their remaining peers and they’ve built an independent delivery network. They’re the only large-scale restaurant that’s been able to do that, that facilitates 100% of their own orders. 

At the same time, they’ve built a big digital distribution platform with 180 million digital users. They’re receiving around 30-40% of all online orders through their own app, which is a significant lead versus other online players. 

Now one of the great things we like about it, as Jacob has highlighted, is the runway for growth. Chain restaurant penetration in China is only 5% versus the US at 65%, so there’s a long runway for growth and whilst they may not catch up to the US there’s still a lot of opportunity in the lower tier cities. 

Yum is on a PE of 22x. It’s got a long duration of sustainable growth and in our view should trade on a high 20’s PE given the sustainability of that growth and when compared to other US equivalent PE’s on lower growth multiples.

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28 April 2020
By Antipodes 3 min