Chen Luo

Chen Luo asked about the factors contributing to Yum China's improved same-store sales growth in Q4 compared to Q3, especially given a perceived easing of online delivery subsidy intensity. She also sought an update on the year-to-date trading environment, particularly around the pre-Spring Festival season, and clarification on why Q4 revenue growth matched system sales growth, a deviation from previous quarters.

Answer

CEO Joey Wat noted early signs of improving consumer sentiment and discussed the operational challenges and strategic focus for the Chinese New Year trading window, confirming year-to-date trading was in line with expectations. CFO Adrian Ding clarified that while system sales growth is typically slightly higher due to franchise business contributions, similar figures in Q4 could be attributed to rounding and the impact of new store openings in the quarter.

Chen Luo from Bank of America asked what specific actions Yum China took to boost same-store sales growth (SSG) in Q4, especially given the eased online delivery subsidy intensity. She also requested insights into the year-to-date trading environment leading up to the Spring Festival, with a preference for lunar calendar comparisons, and sought clarification on why Q4 revenue growth matched system sales growth, unlike previous quarters.

Answer

CEO Joey Wat noted early signs of improving consumer sentiment and emphasized balancing sales initiatives with operational efficiency during the Chinese New Year, which is yet to reach its peak trading. She stated that year-to-date trading was in line with expectations, targeting a fourth consecutive quarter of positive SSG and thirteenth consecutive quarter of positive transaction growth. CFO Adrian Ding explained that while system sales growth is typically slightly higher due to franchise business contributions, similar figures in Q4 could be due to rounding and the impact of new store openings in the quarter.

Chen Luo from Bank of America asked about the sustainability of the observed 40% ratio between system sales growth and store count expansion, given the shift to smaller formats and franchise stores. He also inquired about the progress and economics of improving franchise store profitability.

Answer

CFO Adrian Ding explained that the 40% ratio is not necessarily sustainable due to strategic store portfolio optimization (closure of large stores, opening of smaller ones), new store sales ramp-up, and timing of openings/closures. He indicated more details on the growth algorithm would be shared at the investor day. Regarding franchise economics, he noted progress in improving profitability, with current operating margins slightly lower than equity business but expected to align in the mid to long run, leading to ROIC improvement without short-term margin dilution.

Chen Luo asked about Yum China's expansion strategy, specifically the relationship between 10% store expansion and 4% sales growth, and the progress made in improving the economics of franchise stores.

Answer

CFO Adrian Ding clarified that the 40% ratio of system sales growth to store count growth is not fixed due to strategic store portfolio optimization, new store sales ramp-up, and timing of openings. He noted progress in franchise economics, with operating margins for franchise business being similar to equity business, and slight revisions in pricing mechanisms. He expects no margin dilution in the short run and ROIC improvement in the mid-to-long run.

Chen Luo of Bank of America sought clarification on the delivery platform subsidy war, asking if Yum China bears a significant portion of the subsidies and if this impacted Q2 margins.

Answer

CFO Adrian Ding described the subsidy sharing as dynamic, stating that as a large partner, Yum China enjoys more favorable terms than smaller merchants. While declining to provide specific splits, he confirmed that the company's margin guidance for the second half of the year already incorporates the expected impact of these delivery dynamics.

Chen Luo from Bank of America sought clarification on the online delivery platform subsidy war, asking if Yum China bears a significant portion of these subsidies and whether they had a major impact on Q2 margins.

Answer

CFO Adrian Ding explained that the subsidy arrangements are dynamic, but as a large merchant, Yum China generally receives more favorable terms and subsidy splits. He confirmed that the company's second-half margin guidance—stable for KFC and slightly increasing for Pizza Hut—already incorporates the current delivery dynamics and platform subsidies.

Chen Luo questioned the new store contribution to growth, noting that an 11% increase in store count only yielded 4% revenue growth, and asked if this lower contribution ratio is the new norm due to smaller store formats.

Answer

CFO Adrian Ding clarified that the 4% contribution was influenced by several factors: the timing of openings within the quarter, a higher mix of smaller stores (70-80% of new openings) with lower initial sales, a multi-year ramp-up period for new stores, and a strategic increase in store closures in Q1. He stated this would normalize as the year progresses and reaffirmed the full-year mid-single-digit system sales growth target.

Chen Luo from Bank of America inquired about the implications of the new store expansion strategy—which involves smaller stores, a focus on lower-tier cities, and more franchise locations—on the near-term revenue contribution from new store openings.

Answer

CEO Joey Wat explained the aggressive store opening strategy is driven by significant opportunities and better trading in lower-tier cities, with a strict focus on maintaining payback periods of 2 years for KFC and 2-3 years for Pizza Hut. She clarified that while franchise stores are growing and incremental, company-owned stores still constitute 85% of the portfolio. Acting CFO Adrian Ding added that new stores generate 50-60% of a mature store's revenue in their first year. He concluded that these factors, combined with same-store sales, support the expectation for mid-single-digit system sales growth in 2025.