Goldman Sachs: YUM CHINA (09987) new business progress is encouraging, raising target price to HKD 459.

Goldman Sachs released a report stating that YUM CHINA (09987) delivered solid performance in the second quarter. Management reiterated its full-year 2026 targets (excluding the acquisition of the Pizza Hut brand) during the earnings call, which include same-store sales growth of 0% to 2%, system sales growth in the mid-to-high single digits, operating profit growth in the high single digits, double-digit earnings per share growth, as well as slight improvements in restaurant profit margins and operating profit margins. Management expects positive growth in same-store sales and transaction volume in the third quarter. Goldman Sachs raised its earnings forecasts for 2026 to 2028 by approximately 2.5%, reflecting the second-quarter performance, updated foreign exchange assumptions, and year-on-year improvements in profit margins in the second half of the year. The target price has been adjusted from HKD 452 to HKD 459, with a "Buy" rating maintained. In terms of new business developments, Goldman Sachs believes the progress of new initiatives such as KCOFFEE coffee shops, KPRO, Pizza Hut WOW, and PH Burger Bar is encouraging. The number of KCOFFEE stores has reached 3,300, with management targeting a doubling of sales to RMB 2 billion by 2026 and plans to reach 5,000 stores by the end of the year. KPRO stores have exceeded 450, and management has raised the year-end target to 800 stores (up from the previous target of 600), while also expanding into lower-tier cities. The number of Pizza Hut WOW stores exceeds 400, helping to penetrate lower-tier cities; PH Burger Bar has expanded to over 200 locations in about six months, contributing double-digit sales growth and significant profit to the parent company Pizza Hut. Management plans to accelerate expansion to 500 to 600 stores by the end of the year. YUM CHINA anticipates completing the acquisition of Pizza Hut's mainland brand rights in August, with management expecting that the 3% savings in franchise fees will increase Pizza Hut's restaurant profit margins (after VAT) by approximately 2.8 percentage points, contributing around 60 basis points to the group's profit margin. The group plans to finance the acquisition with approximately $1.2 billion equivalent in offshore bridge loans (at an interest rate of about 2%). Management expects the transaction to slightly enhance earnings per share in 2026, with mid-single-digit enhancements in 2027 and 2028. Management has raised its guidance for new Pizza Hut store openings in 2027 and 2028 to over 800 stores each year (up from over 600).