Buy The Weakness in Yum China Shares, Says Morgan Stanley Analyst

Yum China Holdings Inc (NYSE: YUMC) reported fourth-quarter results in early February that prompted a 10-percent sell-off in the stock, which should be viewed as a buying opportunity, according to Morgan Stanley.

The Analyst

Morgan Stanley's Lillian Lou maintains an Overweight rating on Yum China's stock with an unchanged $48 price target.

The Thesis

Yum China's recent weakness can be attributed to management's commentary on challenges in the first half of 2018 from a tough year-ago comparison, Lou said in a research report. But the decline in the stock should be seen as a "short-term blip" for three key reasons, the analyst said: 

• Only 20,000 fast food chain restaurants are spread across all of China, despite a population of around 1.4 billion, Lou said. Through 2020, the country should see an incremental 5,800 units, and 24,000 new units by 2030, according to Morgan Stanley. Yum China has the largest existing store exposure in the country among its peers and boasts a brand leadership position.
• KFC remains in "solid shape," and cannibalization between delivery and dine-in units is "limited." The dine-in business is seeing positive traffic, and delivery contributes around 80 percent of total same store sales growth with margin accretion, Lou said. 
• Yum China has a "solid plan" to turn around Pizza Hut, but it will take time, the analyst said. The company has identified four areas of the Pizza Hut business to fix over the next 18 to 24 months: fundamentals, digital initiatives, delivery options and experiments with new models.

Price Action

Yum China shares were up 1.7 percent at the time of publication Tuesday afternoon. 

Related Links:

Yum Brands Upgraded On Yum China Spinoff, Refranchising Success

For Yum Brands, Pizza Hut Disappoints While KFC And Taco Bell Shine

Photo by Jonathan McIntosh/Wikimedia.