Yum China Holdings Inc (YUMC-N)

(A Top Pick Feb 14/24, Up 21%)

An EM stock, so it gets swamped with news of China. Still, a safe way to invest in China. Has grown footprint by capitalizing on weakness in economy. Massively undervalued; he'd consider buying today.

(A Top Pick Dec 13/23, Up 26%)

Very good balance sheet, no debt. Very reasonable price point. Regardless of the strength of the overall Chinese economy, people still need to eat. Whips around along with sentiment on China, and it will take some time to decouple from that. Still likes it for the long term.

(A Top Pick Aug 03/23, Down 40%)

Would continue to buy today. First-class operator. Best-in-class growth, lowest-in-class valuation. Sold off hard along with the rest of China. As part of a diversified portfolio, you want some EM exposure. Trades at 12x earnings, much less than NA peers.

YUMC vs. QSR

Uncertainty with QSR is that previous changes were difficult because it's a multi-brand platform. Valuation is very reasonable. Very good growth profile and management. Balance sheet is not investment grade, and some don't care. He cares, as it's difficult to grow if you're not investment grade. Investment grade gives you much larger pool of people who can supply capital.

Likes QSR, but owns YUMC instead. YUMC wins from a valuation and growth perspective, but also has more geopolitical risk.

Wins big on valuation. Massive amount of cash on balance sheet, no debt. Trades around 14x earnings. Valuation due to negative sentiment on Chinese economy. Very robust FCF yield. Massive opportunity for growth over the next 10 years at a very discounted valuation. Yield is 1.7%.

Hurt by Covid, but has come out flying. Took advantage of low interest rates to accelerate store rollouts. A lower-risk way to play a Chinese recovery.

(Analysts’ price target is $54.81)

Valuation is in the dumps. First-class operator. Rock-solid balance sheet, no debt at all. Net cash north of $2.5B. Great management team and digital capabilities. With cash so available, increased store count during distressed times. Unique, best of breed, depressed valuation of 16x adjusted earnings. 

Over 400M loyalty members on digital app, more than entire US population, which highlights just how well they can grow. Better growth outlook than almost everyone in its space. Yield is 1.6%.

(Analysts’ price target is $55.34)

Spun off by Yum! Brands, so pure-play China but with western governance. Lower-risk way to play exceptional growth in China. Pristine balance sheet with more than $3B cash. Strong management. Accelerating store buildout. Amazing digital capabilities. Amazing valuation. Yield is 1%.

(Analysts’ price target is $61.78)

Can play offense aggressively. About $3B in net cash on balance sheet. Used excess capital to accelerate store buildout and growth profile. Results from this won't be seen for 5-10 years. Wonderful management and best-in-class digital capabilities. Pursued vertical integration to secure product availability. Yield is 0.90%.

(Analysts’ price target is $72.92)

(A Top Pick Feb 16/22, Up 14%)

Exceptionally well run. Amazing digital capabilities. China is an unpenetrated market. Negatively affected by sentiment, and that's when you want to take advantage. Still holds, and would be willing to buy today.

(A Top Pick Dec 17/21, Up 19%) KFC, Taco Bell, Pizza Hut, plus other local brands. Wonderfully run. Beaten down by Covid and the threat of delisting. Wonderful balance sheet that can be used to accelerate growth. Valuation has gone up, so it's a hold for him instead of a buy.

(A Top Pick Dec 17/21, Down 9%) It's been punished by lockdowns in China. Well-run with dominant brands. They did an equity raise in Hong Kong 2 years ago, so they have a lot of cash. They've been using that to build-out their restaurants, so in 5-10 years time growth looks good. But over the short term is down.

(A Top Pick Aug 17/21, Down 31%) Unique business. Hit with Covid lockdowns and regulatory skirmish between US-China. Fear of delisting, though listed also in Hong Kong. Over 4B in cash to continue building out or buy back shares.

(A Top Pick Feb 25/21, Down 17%) Caught in regulatory shift. Building new stores. Hampered by massive lockdowns. As Covid recedes, it will benefit. Long-term demographics remain favourable. Rising disposable income, young population, and longer working hours for urbanites should increase restaurant spending. 14-15% long-term earnings growth. China is tricky, so for new clients, he's taking only partial positions.

Largest restaurant operator in China. All things China have been in the penalty box. Low regulatory risk. Constrained by pandemic, Q4 results weaker than expected. Long-term compounder from growth in an unpenetrated market. Inexpensive valuation. Strong balance sheet. Yield is 0.92%. (Analysts’ price target is $61.88)

A lot of negative sentiment on China, however company is largest restaurant operator in China. Lots of cash on balance sheet (over $4 billion). Great management team. Business can scale very well. 5-10 years will see exceptional growth. 320 million users of order app (exceptional).