Analyst Note| Ivan Su |
Wide-moat Yum China delivered operating income of $191 million for the first quarter of 2022, coming at the top end of the guidance range. Management's overall message is consistent with previous commentary made in March, pointing to an unprecedented number of challenges brought on by the omicron outbreak. The restaurant group is weathering traffic weakness due to widespread lockdowns, but we continue to view this as a short-term challenge and remain confident in the firm's long-term outlook. KFC remains absent in more than 1,000 cities, and the company has additional opportunities to increase store density in the 1,700 Chinese cities in which it currently operates. The rising demand for fast food further supports long-term trends such as longer working hours, rapidly rising disposable income, and ever-smaller family sizes. Although China's zero-COVID-19 policy remains the most significant near-term risk to earnings, we remain confident that Yum China will pull through the current industry headwinds and become a stronger and more agile business. We consider the recent share price performance an overreaction to near-term weakness, and we view shares as heavily undervalued—trading at a 50% discount to our fair value estimate of HKD 670 (USD 86).