Yum China's Quality Comps Impress
The wide-moat company is one of the best ways to play the improving consumer disposable income trends in the region.
Although retail tax law changes were the key driver behind the 370-basis-point increase in restaurant margins to 23% (and likely pushing full-year restaurant margins to the low to mid-16% range), we now believe the aforementioned digital and delivery initiatives coupled with other in-restaurant staffing and operational efficiencies will push longer-term restaurant margins ahead of management's 17% target. This, in turn, should fuel greater shareholder returns beyond the $300 million share-repurchase authorization (including a potential dividend).
We plan to raise our $33 fair value estimate by a dollar or two to reflect the first-quarter upside and increased top-line outlook for 2017. We view Yum China as modestly undervalued.
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