Morningstar: Maintains YUM CHINA (09987) fair value estimate at HK$600 per share; current price at a 40% discount

Morningstar released a research report maintaining its fair value estimate for YUM CHINA (09987) at HK$600 per share, believing that the current share price represents a 40% discount to fair value and that the valuation is clearly undervalued. The institution's previous valuation model had already incorporated the company's plans to accelerate expansion in lower-tier cities and in the Pizza Hut business. YUM CHINA's third-quarter revenue grew 2% year on year, and core operating profit rose 6% after excluding the impact of exchange rate fluctuations. Although severe weather in August and reduced delivery subsidies led to a decline in same-store sales, the company's performance still maintained growth. Morningstar noted that on the earnings call, management focused on the recently completed acquisition of the Pizza Hut business in mainland China. By directly controlling the mainland China Pizza Hut business, YUM CHINA has gained greater autonomy in product testing and has also made it feasible for more stores to achieve profitability. The call further strengthened the institution's confidence in the company's future market share gains and margin improvement. YUM CHINA can now introduce new store formats and sell new products such as frozen durian. Because it no longer has to pay royalty fees, these measures are expected to bring higher margins. In addition, when launching new business initiatives, the company no longer needs to wait for approval from its U.S. headquarters. This partly explains why management raised this year's store opening target from 1,900 to 2,400. More than half of the new stores opened in the third quarter are located in new commercial areas, indicating that there is still substantial room for the company's long-term expansion.