Yum China Holdings (YUMC), priced at $28.10 with a market capitalization of $10.8 billion, is a Chinese fast-food company that was spun off from its U.S. parent in October. It posted robust earnings in its inaugural quarterly results. On Oct. 31, 2016, Yum! Brands (YUM) completed the tax-free spin-off of Yum China Holdings. On Nov. 1, 2016, Yum investors received one share of YUM China stock for each share of YUM they owned.
Yum China is comprised of more than 7,300 restaurants in more than 1,100 cities, making it the largest independent restaurant company in China with exclusive rights to the KFC, Pizza Hut and Taco Bell brands in the country, as well as ownership of the Little Sheet and East Dawning concepts. Over the long term, Yum China sees potential to triple its number of restaurant units.
The company expects to add 550 to 600 new stores in 2017. Additionally, YUMC expects its capital expenditures to be in the range of $400 to $500 million during 2017. The company anticipates double-digit growth in its operating profit along with margin expansion, excluding forex, strong cash flow and enhanced balance sheet position. The Board of Directors has approved a shares repurchase program worth $300 million.
Yum China should benefit from its strong presence in Mainland China, wide franchisee mix and focused investment to improve the customer experience. We are encouraged by the company’s new unit builds and digital acceleration, which is expected to enhance customer penetration and boost sales growth. Further, YUMC’s successful launch of Taco Bell holds potential to propel the sales in the future.
Margin improvement and strong cash flows should drive future earnings and create value for shareholders. We value Yum China Holdings on a relative valuation basis using EV/EBIT (16.5 x) and P/E (24.0 x). This generates a price target for Yum China of $35 per share, implying a 25% upside from the current market price of $28.10 (see “YUM Value”).