Daily Investment Strategy

Daily focus：Yum China（9987）

With the two sessions coming, investors can pay attention to consumption stocks. Yum China's system sales for the 4Q24 increased by 4% yoy, primarily due to a 5% contribution from net new unit. Operating profit increased by 36% yoy to $151mn. Core operating profit increased by 35% yoy. Thanks to continuous efforts to improve operational efficiency, the operating profit margin was 5.8%, an increase of 140 basis points yoy, benefiting from the increase in restaurant profit margins. The company stated that the proportion of management and administrative expenses to revenue this year will decrease slightly, and the core operating profit margin is expected to remain relatively stable or slightly increase. The goal is to maintain KFC's healthy profit margin and continuously improve Pizza Hut's profit margin in the medium and long term. It is estimated that there will be a net increase of 1,600 to 1,800 stores in 2025. The company is constantly increasing the number of directly operated and franchised stores, and is steadily moving towards the goal of achieving 20,000 stores in 2026. Franchisees enable the Company to expand into remote areas, lower-tier cities and strategic locations previously beyond its reach.  The Company anticipates the franchise mix of net new stores will gradually increase to 40-50% for KFC and 20-30% for Pizza Hut over the next few years. Yum China stated that it plans to return US$4.5 billion to shareholders between 2024 and 2026, which means a total return of US$3 billion in the next two years, equivalent to approximately 9% of the company's average annual market value. Since the end of last year, we have noticed that the price cut of Tastien, one of the KFC's largest competitors, has slowed down, which is beneficial to Yum China. In recent years, price competition in the Chinese restaurant market has been fierce, but the current situation has improved. Management also stated that some existing competitors have recently begun to rationally adjust their promotion intensity, which shows a positive change in the competitive environment. Overall, the group's operating efficiency has improved, and Pizza Hut WOW and KCOFFEE have successfully attracted new customers. The share is outstanding when compared to its peers in the consumer sector. Target price is HK$460.

China's February Purchasing Managers' Index (PMI) Exceeds Market Expectations

The National Bureau of Statistics of China announced that February's Purchasing Managers' Index (PMI) exceeded market expectations. The Manufacturing PMI rebounded from the previous value of 49.1 to 50.2, returning to the expansion zone. Among the sub-indices, the New Orders Index rose to 51.1, but while the New Export Orders Index also improved, it remained in contraction at 48.6. The ex-factory price contraction remained unchanged. For non-manufacturing PMI, the index slightly increased by 0.2 to 50.4, mainly driven by a resurgence in construction business activity into expansion territory. However, the Business Activity Index for the service sector fell by 0.3 from the previous value, to the critical threshold of 50 that separates expansion and contraction. Officials explained that this was primarily due to the fading post-holiday effects and a decline in activities related to consumer spending.

On Friday, Southbound Stock Connect recorded a net inflow of HK$11.9 billion into Hong Kong stocks. Tencent Holdings (700) saw the largest inflow at HK$1.49 billion, followed by Alibaba (9988). Meanwhile, Southbound Hang Seng Technology ETF (3033) recorded the largest net outflow at HK$1.23 billion, followed by BYD Electronics (285).