Yum China (YUMC)

Consumer Discretionary

Quo Vadis Capital

John Zolidis sees the potential for ~50% of the current m/cap to be returned to shareholders over the next 5 years, while YUMC simultaneously grows its EBITDA by nearly 50%. The company’s ability to grow while this capital return programme is underway highlights both the model and value creation from new unit openings. Its valuation has contracted while domestic restaurant stocks have seen valuation expansion establishing an extreme relative multiple discount. A 10.5x EV/EBITDA multiple generates a 34% 1-year return using 2026 forecasts. Over 4 years, a 12x multiple vs. John’s 2029 estimates produces a double, not including dividends. Downside is protected based on unit growth, cash flow, buybacks and the current 8.6x multiple.

- 21 February, 2025

Yum China (YUMC)

Consumer Discretionary

Quo Vadis Capital

John Zolidis believes 2Q24 results highlight two facts about YUMC: 1) It has a very powerful set of fundamentals. It is growing units at a DD rate. It is maintaining DD EBITDA margins. The company has $3.1bn in cash net of borrowings (23% of the market value) and John expects $1.5bn in capital return this year. 2) Management continues to impress. YUMC did post negative SSS, but both KFC and Pizza Hut grew transactions. Meanwhile, margins were resilient and above his estimates. At the current price, investors are being offered YUMC's growth and FCF at a significant discount.

- 09 August, 2024

Which unit growth stories can be bought at a discount?

Consumer Discretionary / Staples

Quo Vadis Capital

John Zolidis reviewed 18 unit growth stories in the consumer space, breaking out the value of the existing business from the implied value of the growth option. He then calculated the value of future unit growth using a store level DCF. He compared the implied value of the growth option in the first exercise to expected value creation from store growth in the second. From this John solved for where the market was paying the largest premium to the value of future growth and where growth could be purchased at a discount. The most interesting names on the long side were Academy Sports & Outdoors, Luckin Coffee and Yum China. Sprouts Farmers Market still looks very cheap even after +50% move YTD. Investors are paying the biggest premium for Dollarama, Chipotle and Dollar Tree.

- 22 December, 2023

Yum China (YUMC)

Consumer Discretionary

Quo Vadis Capital

Among John Zolidis’ favourite investment themes is a positive trend in unit level ROIC and this has been part of his thesis on YUMC for several years as the company has migrated store formats to smaller and more off-premise oriented locations with lower capex per unit. Cash investment per store has been cut by an incredible 35% per store since 2019. Looking forward, he believes this trend can continue and contribute to better incremental returns and higher margins. The stock is up only 3% YTD, which John attributes to relentless negative media about China. The shares trade at 10x EV/EBITDA (2024).

- 29 September, 2023

Fund Positioning Analysis: EM Restaurants

Consumer Discretionary

Copley Fund Research

EM fund exposure in the Restaurants industry group is soaring to new heights - a record 51.1% of the active EM funds in Steven Holden’s analysis now have exposure with the largest increases in weight dominated by Growth and Aggressive Growth investors. Ownership increases were seen in Yum China Holdings, Americana Restaurants and Jollibee Foods over the last 6 months, whilst net positioning fell in Jiumaajiu International and Jubilant Foodworks. Invesco EM All Cap and First Sentier Global EM are allocating over 10% to the sector with a further 7 funds allocating more than 5%.

- 03 March, 2023

Yum China (YUMC)

Consumer Discretionary

Quo Vadis Capital

There are very few $26bn Mkt/Cap companies that can grow units sustainably at a DD rate - the combination of accelerating unit growth, resumption of share repurchases (has $4.3bn cash) and margin upside (margins and ROIC at the unit level are tracking ahead of pre-covid levels even as unit volumes have yet to fully recover) suggest upward revisions to future year estimates. In return for taking some China-related risk, you're getting access to a very attractive business trading at a meaningful discount.

- 06 August, 2021