A quantitative approach to valuing Yum China ($YUMC)

A quantitative approach to valuing Yum China ($YUMC)

(YumC is paying $1.2bn to own the Pizza Hut brand in china, this removes the 2.8% royalty fees it has to pay Yum Brands. The shares has since fallen lower and YUMC is a forgotten child in the world of fast food chains. There are many reasons for the current pessimism, one is sovereign risks, the other is that China's domestic consumption isn't growing, the most recent being that they overpaid for Pizza Hut. This post is not to discuss these business factors, but to look at the results, and use the numbers to see if we can derive a fair value of YUMC. Of course if i were to invest in YUMC, i should look deeper in the capex/D&A, Same Store sales, Traffic vs Ticket size etc, earnings call transcript).

(I am using the same format as the paper valuation)

Yum China Holdings Inc, End FY: End Dec, This report: Q1-2026. Date Written: 25th June 2026

1. SP: $41, Market Cap: 14bn Revenue: 12bn
2. Trailing EPS (Diluted): 2.61 (normalised): 2.61 (Zacks): 2.61
3. Yield (dividend): 2.59 (5yAvg): 1.28 (BuyBack):8.41 (5yAvg): 3.398
4. ROA, ROE, ROIC: 8.66%, 16.87%, 11.14%
5. P/E (ttm): 15.7, P/E (normalised): 15.7, (5yrAvg): 24.79, (fwd): 13.96
6. Debt / Equity: 0.38, Net Debt / EBITDA: (2.32 - 0.47) / 1.76 = 1.05
7. Average FCF/ NI over 5 and 10 year = 94%, 98%.
8. Past Growth (stated)

|CAGR|Qtr/YOY%|1-Year|3-Years|5-Years|10-Years|

|:-|:-|:-|:-|:-|:-|

|Revenue%|9.73|4.37|7.23|7.38|5.5|

|Net-Income|5.82|1.98|28.09|3.45|11.14|

|EPS%|12.99|7.73|34.14|5.18|11.73|

9. Past Growth (manually calculated)

Pre-covid from 2016 to 2019 = (1.77/1.28)\^(1/3) -1 = 11.4% CAGR

Post-Covid from 2022 to 2025 = not calculated because Covid measures lifted in 2023, giving too short a run-way

Total period from 2016 to 2025 = ( 2.51/ 1.28)\^(1/9) -1 = 7.77% CAGR

10. Management Guidance

\- Yum China outlines $1.5B 2026 shareholder returns while targeting 20,000 stores

\- "We expect the situation in the Middle East to have limited impact on the cost of sales this year" and "We have already secured the majority of this year's procurement contracts" (CFO Ding). "We strive to maintain OP margin roughly in line with the prior year period in quarter 2" (CFO Ding).

\- "We are confident in meeting the full year targets for 2026" including "same-store sales index of 100 to 102, mid- to high single-digit system sales growth, high single-digit operating profit growth, double-digit EPS growth" plus "a slight improvement in restaurant margin and OP margin" (CFO Ding).

\- Compared with the prior quarter’s setup for Q1, management now said "same-store sales growth will sequentially improve for Yum China, KFC and Pizza Hut in quarter 2" (CFO Ding), while reiterating that "rider costs remain the biggest headwind" (CFO Ding).

11. Forward Growth Estimates from Analysts

a. Zack's Next 5 years EPS CAGR: 12.10%

b. S.A. 5 years EPS growth, stated: 11.66%, manual calculation = 17.2%

c. CFRA, stated: 8%

d. MS-NR, stated = 17.2% manual calculation = 17.2%

e. Refinitive = 12.5%

d. DCF, manually calculated to 12.71%

12. My calculation for fair value

scenario 1: 12% EPS Growth CAGR for next 5 years

|Growth Scenario|12%|9%|5%|

|:-|:-|:-|:-|

|Duration|5 years|5 years|5 years|

|Multiplier|25x|22x|18.71x|

|TTM EPS|2.61|2.61|2.61|

|Fair Value|65.25|57.42|48.83|

1. Morningstar Fairvalue for YUMC = $77

CFRA fairvalue for YUMC = NA but with a 12 month target of $46

Conclusion:

Currently the share price is $41. it is currently priced roughly as though the company will just growth for inflation at 3% forever, (math: 2.61 / (9% discount - 3%) = $43.5, nevermind that forward estimates for growth is around 8% to 17% for the next 5 years. Most of the metrics have improved including margins, inventory turnover, and return to capital.

And yet, the number of professional funds remainly stubbornly low, even Howard Marks gave up and sold one year ago at the highs even though the business performance isn't as good as it is today.

As i alluded earlier, there is a discount to China stocks or in this case an USA stock wholly on China. My past purchase was in jan 2024, at around the current price and then decided that the country risk was a large unknown, and sold and made a small profit. (you can read my past dd on yumc, just use search).