Analyst: A Trade War Could Dent Yum China's Margins

In the event that a trade war between U.S. and China flares, how will American restaurant chains in China, like Yum China Holdings Inc YUMC, fare? Bernstein has a theory. 

The Analyst

Bernstein's Sara Senatore maintains a Market-Perform rating on Yum China's stock with an unchanged $43 price target.

The Thesis

Yum China has fallen victim to broader geopolitical tension between the U.S. and China in the past, Senatore said in a Friday note. For example, anti-U.S. protests in 2016 stemming from a judgment against China by an international tribunal resulted in sales weakness for Yum's properties in the country. Similarly, a 2014 food safety scandal prompted a double-digit decline in Yum's business, the analyst said. 

Yum China's growth story has been historically correlated to economic growth in the country, Senatore said. Prior to 2012, Yum Brands' earnings in the country were growing at a "remarkably consistent" pace, as the Chinese business "was relatively insulated from country risk," she said. Needless to say, any "exogenous driver of a comp slowdown," such as a trade war, would have a notable impact on margins, the analyst said. 

Even without any sales volatility from a trade war, Yum's China business is unlikely to see any margin expansion in light of its ongoing investments in value and technology, Senatore said.

"To date, in initiatives like digital payments and delivery, YUMC is growing with the market but not substantially ahead." 

Price Action

Shares of Yum China Holdings were trading lower by about 1.5 percent at the time of publication Friday. 

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