Yum China Earnings: Excelling in Adversity; Shares Very Undervalued

Wide-moat Yum China beat our earnings expectations by approximately 9% for the second quarter, despite a 4% shortfall in revenue. The company's standout performance was attributable to its effective expense management, which enabled it to achieve double-digit EPS growth year on year despite unit-level operating challenges caused by a drop in same-store sales—a remarkable accomplishment not mirrored by its peers, who have mostly reported significant profit declines. With management reaffirming its near- and medium-term outlook, we maintain our $76 fair value estimate. Currently trading at around $30, Yum China's shares present significant upside potential. The market appears to underestimate two key factors: 1) Yum China's potential for market share gains within the rapidly evolving Chinese restaurant sector, and 2) further margin improvements facilitated by increased operational leverage and an accelerated shift toward more franchising.