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Yum China (Part 2): Brand Financials

In Part 1 of our Yum China series, we introduced the history and business portfolio of Yum! Brands' China-based spin-off, Yum China. In this article, we explore Yum China's financial metrics and examine the performance of the company's individual restaurant segments.

Yum China Series

Note: to be consistent with Yum China's financial reporting presentation, we use US dollars in this article rather than Renminbi.

Note: minor discrepancies may exist between diagrams in the article due to rounding


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Financial Overview

We first start with a company-level financial overview.

#1: Yum China's Total Revenue Grew At A CAGR of 4.9% Over The Past Five Years

Yum China's total revenue grew from US$7.77 billion in 2017 to US$9.85 billion in 2021, with a slight dip in 2020 due to the COVID-19 pandemic. During the same time period, the company's operating income increased by nearly 80% from US$778 million to US$1,386 million, with a noticeable jump in 2021 due to high other income primarily arising from a US$618 million equity interest re-measurement gain. Operating income for 2018 and 2020 were also inflated by similar gains of US$98 million and US$239 million respectively.

Note: specifically, in 2018, 2020, and 2021, Yum China re-valued its previously held equity interests in Wuxi KFC, Suzhou KFC, and Hangzhou KFC, three affiliates that operated KFC in Wuxi, Suzhou and Hangzhou cities, in order to financially consolidate these entities that were previously accounted for using the equity method.

Yum China Revenue and Income
Data Sources: Yum China Annual Reports (click image to enlarge)

#2: 90% of Yum China's Revenue Comes From Restaurant Sales

Breaking down Yum China's revenue drivers, we see that restaurant sales (referred to as "company sales") account for 90% of the company's total revenue each year, followed by transactions with franchisees and unconsolidated affiliates contributing 7% to 8%, and franchise fees and income generating 2% of total revenue.

Each revenue driver is defined as follows:

Company sales refer to in-store food sales and food sales via delivery channels. According to management, delivery sales contributed 32% of company sales in 2021.

Transactions with franchisees and unconsolidated affiliates consist of the sales of food and paper products to, and advertising and miscellaneous services provided for, Yum China's franchisees and unconsolidated affiliates. With regards to the former, Yum China centrally purchases the requisite food and paper products for almost all of its restaurants directly from suppliers, and sells and delivers the items to each individual store in its network. With regards to the latter, Yum China is typically responsible for contracting third-party advertising agencies and collects advertising contributions as a percentage of sales from its directly operated and franchised restaurants. Other services provided to franchisees and unconsolidated affiliates mostly comprise of customer and technology support services.

Franchise fees and income include upfront franchise fees (i.e. initial and renewal fees) and continuing fees.

Other revenues refer to services provided to KFC And Pizza Hut by Yum China's centralized delivery team, as well as logistics and warehousing services provided to third parties.

Yum China Total Revenue Contribution Breakdown
Data Sources: Yum China Annual Reports (click image to enlarge)

#3: Yum China Is A Low Margin Business With Declining Restaurant Margins

Yum China reports two margin metrics: restaurant margin, a gross profit margin metric that captures the profitability of the company's directly operated restaurants, and operating margin, defined in the traditional sense as accounting operating income divided by total revenue. Both margin metrics are in the low to mid teens, with Yum China's restaurant margin declining gradually over the years from 16.7% in 2017 to 13.7% in 2021. At the same time, operating profit margin was 10% in the two years without substantial other income gains (i.e. 2017 and 2019), but was higher in the other three years as a result of the equity interest re-measurement gains discussed above.

Yum China Profit Margins
Data Sources: Yum China Annual Reports (click image to enlarge)

*Restaurant margin is defined as (company sales - restaurant expenses)/company sales, where restaurant expenses refer to all expenses incurred with regards to the operations of Yum China's directly owned restaurants

#4: Yum China's Restaurant Expense Structure Is Relatively Constant

Yum China's restaurant expenses can be broken into three categories: food and paper products, payroll and employee benefits, and occupancy and other operating expenses. The company's overall expense structure has remained close to constant over the past five years, with a minor rise in the share of food and paper products and payroll and employee benefits, along with a slight decrease in the share of occupancy and other operating expenses.

Yum China Restaurant Expenses Breakdown
Data Sources: Yum China Annual Reports (click image to enlarge)

#5: Yum China's Growing Revenues Are Not Being Translated Into Higher Cash Flows

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