About Yum China
Since the inception of MacroHint, we haven’t found ourselves writing too many stock analysis articles on companies involved in or major parts of spin-offs, however this changes effectively immediately as we bring Yum China into the picture.
First and foremost, like many terms and phrases in finance, they are made to sound a lot more complex than they actually are.
As one could imagine, the action of a spin-off is by no means an exception.
A spin-off is simply when one company spins off one of its divisions, branches or subsidiaries and what was once one becomes two separate entities. The entity that is spun off typically either becomes a new entity of its own or another company’s subsidiary.
The former happened to Yum China in 2016, as during years prior it was a corporate subsidiary of Yum! Brands (yes, there’s an exclamation point) which is now technically its own entity but we generally don’t see any major differences between the two companies except for their respective geographies in which they operate.
We’ll get back to this later.
Other than that, Yum! Brands is still one of the largest fast food, convenient dining behemoths as it is home to some familiar names such as Kentucky Fried Chicken (KFC), Pizza Hut, Taco Bell and The Habit Burger Grill and Yum China is home to most of the same brands across the ocean westward except instead of operating predominantly in the United States, it hosts most of its operations in and throughout China.
Yum China is headquartered in Shanghai.
We’d also like to briefly mention that instead of owning The Habit Burger Grill, Yum China owns COFFii & JOY, a popular coffee bar in the region, along with their Asian divisions of KFC, Pizza Hut and Taco Bell as we mentioned before.
Now that you have a better idea of what Yum China does, the business segment it operates in as well as its similarities and differences from Yum! Brands in America, let’s dig into this company’s numbers and financial figures in order to determine whether or not Yum China’s stock is worth picking up a few shares in.
Yum China’s stock financials
Currently trading at around $40 per share, Yum China has a market capitalization of $16.73 billion, a price-to-earnings (P/E) ratio of just under 26 and currently pays investors an annual dividend of $0.48.
So far, so bland given that this company is rather large (just solely referencing its market capitalization, even though it pales in comparison to its former owner) and initially uninteresting. Additionally, the company’s rather high P/E ratio (roughly six points higher than what is generally considered fair value or what it’s worth paying for) isn’t exactly encouraging, especially in this currently already bearish market environment.
A quick note on investing in Chinese companies
In addition to the present macroeconomic backdrop, investors must also consider the fact that Yum China operates primarily in China, which has a different economy, political system which has all seemingly culminated into other major companies in the region having been reportedly plagued with delisting concerns.
These aren’t just small, obscure state-owned companies.
These include the likes of some of the largest China-based companies in the world such as Alibaba, JD.com, Pinduoduo and of course, Yum China among others.
While we don’t see Yum China as completely state-owned, we think investing in China generally speaking would be like fishing in murky waters off of the coast of an alligator-infested swamp in Louisiana before daybreak.
Dangerous and unpredictable.
While uncertainty can subsequently lead to opportunity, we’re comfortable admitting that we’re not ultrafamiliar nor are we completely convinced that investing in China from a pure regulatory standpoint is the best idea at the moment.
We’re also comfortable admitting that we could be wrong; this is just merely our take on the situation.
Back to the numbers.
According to Yum China’s balance sheet, the company’s management team oversees approximately $13.2 billion in total assets paired with around $6.1 billion in total liabilities. As we’ve harped on in previous articles, the food service industry is littered with waste and low margins which is why we’re partially surprised by how robust Yum China’s balance sheet is.
With its total assets standing at more than double the amount of its total liabilities, if managed properly as it apparently has in previous years, Yum China seems to be financially prepared to handle any more COVID-19-related challenges such as store closures along with supply chain-related stresses as well.
What’s also encouraging about this company’s financials is that its total revenue has been predominantly trending to the upside in recent years. Specifically, over the past five years the company’s total revenue has risen from around $7.7 billion in 2017 to just south of $10 billion in 2021. For a company as large and well established as Yum China it’s nice to know that the company is still growing its revenues, steadily but certainly.
Our team was initially concerned that due to widespread shutdowns in China Yum China wouldn’t be able to adapt digitally and subsequently take a hard hit in revenue. However, it appears as though the company was still able to pivot and get food delivered to its local consumer base (probably through local third-party delivery platforms or certain stores in certain regions and provinces being partially opened) during the brunt of COVID-19.
This reinforces our views on this company’s overall resilience.
The ability to generate positive net income over the past five years has also been a strong suit of Yum China as its net income (according to its cash flow statement) stood at $424 million in 2017 and has since extended up to nearly $1.1 billion in 2021.
We find this to be quite impressive.
Yum China’s stock fundamentals
Unsurprisingly, Yum China’s trailing twelve month (TTM) net profit margin is just slightly higher than that of the industry’s average. Specifically, Yum China’s net profit margin presently stands at 8.11% compared to the industry average of 6.96%, according to TD Ameritrade’s platform.
As we’ve previously touched on the idea that the fast food industry is typically flustered with relatively low margins (namely because they have to keep prices low and the costs of food can vary and be quite sensitive), it’s definitely great to see that Yum China is staying ahead of the industry average from a profit standpoint in a landscape as competitive as fast food.
From a returns standpoint, the company’s TTM returns on equity, assets and investment are all slightly lower than that of the industry average.
While this isn’t necessarily the most optimal outcome we would’ve hoped for, we think that as most established, large-scale companies (including Yum China) continue to operate, they’ll get more out of their assets and subsequently returns on their equity and investments in the long run.
We think this is one of those companies to be patient with as it relates to achieving core returns comparable to the competition.
We’re also thankful that its core return metrics aren’t far off from the competition.
Should you buy Yum China stock?
The biggest gripe we have with this company, oddly enough, isn’t the company’s fault nor does it have much direct control over our concerns, but we see them as valid concerns nonetheless.
Geopolitics and operating in China.
While this company’s numbers are overall quite strong, we don’t want to be mired in worry, constantly thinking about the very real threat of this company being delisted from the New York Stock Exchange (NYSE) or getting in trouble with the government in China and experiencing difficulties overseas.
While our risk tolerances may be different from yours, given all of the aforementioned information, including the fact that the stock itself is mildly overvalued, we currently deem it appropriate to give Yum China a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.