UBS: Yum China's Growth Fueled By Food Innovation, Digital Initiatives

Yum China Holdings Inc YUMC hosted its 2019 Investor Day in Shanghai, and the company's comments suggest that its future growth will be driven by digital initiatives and food innovation, according to UBS.

The Analyst

UBS analyst Christine Peng maintained a Buy rating on Yum China with an unchanged price target of $46.07.

The Thesis

The fast-food restaurant giant announced that membership at its KFC division has crossed 160 million and said its Pizza Hut division surpassed 50 million by the end of the fourth quarter. These two divisions accounted for 47 percent of total revenue in the quarter, Peng said in a Wednesday note. 

Initiatives to monetize the membership program are in place, the analyst said. Between 2016 and 2018, revenue generated from KFC and Pizza Hut has grown about 80 percent and 90 percent, respectively, she said.

The Privilege Subscription Program launched in late 2018 is boosting monthly spending by 2.1x at KFC and by 1.6x at Pizza Hut, Peng said. 

Food innovation has also become a meaningful growth driver, the analyst said. New products contributed 13 percent of sales at KFC and 22 percent at Pizza Hut in 2018, she said, adding that Yum China is undertaking more opportunities like this. 

The company is targeting shareholder returns of $1.5 billion over the next three years, and the current share repurchase authorization of $960 million is likely to be completed during this timeframe, according to UBS. 

Price Action

Yum China shares were trading down 0.3 percent at $41 at the time of publication Wednesday. 

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Photo via Wikimedia.