China Food

Yum! China’s second public offering today plans to spend 8 billion to continue opening stores, reiterating that there may be more than 20000 restaurants in the future

“Shoulder by shoulder” with Nongfu Shanquan, yum! China has finally begun to offer shares publicly.

Today, yum! China (Stock Code: 9987) opened its offering in the Hong Kong stock market. It is expected to set prices on September 4 and list on September 10. The company plans to issue 41.9107 million ordinary shares, including 40234200 shares for international sale and 1676500 shares for Hong Kong. The public offering price will not exceed HK $468 per share.

“Our secondary listing in Hong Kong will provide our stakeholders with an additional channel to invest in the company, bringing us closer to where we operate and where our customers and communities flourish.” Qu Cuirong, chief executive of Yum! Brands China, said in an open letter.

Yum China owns the exclusive rights to operate the three major brands of KFC, Pizza Hut and Taco Bell in mainland China. The company has previously completed a spin off from Yum! Brands and has been listed on the New York Stock Exchange as an independent company since November 1, 2016.

In the nearly 400 page prospectus released today, yum China also disclosed the purpose of raising funds and shareholder structure, the development status of its business, and the future business competition strategy, as well as the risk factors that may be faced under the rapid expansion.

Next, the snack generation will take you to have a look.

Purpose of fund raising

In its prospectus today, yum China said that it is estimated that, based on the indicative maximum public offering price of HK $468 per share, assuming that the over allotment rights have not been exercised, the net amount of funds to be raised from the global offering, after deducting underwriting commissions, fees and estimated expenses payable in respect of the global offering, will be about HK $19.274 billion, or HK $22.178 billion, if the over allotment is fully realized Exercise).  

Xiaoshidai compared with previous documents to see that the prospectus released today added details of the use of raised funds.

First, about 45% (or about HK $8.673 billion) will be used to expand and deepen the restaurant network. “We have the potential to grow to 20000 or more restaurants in the future. We will focus on expanding our business in existing and new cities and are tracking more than 800 cities without KFC or Pizza Hut restaurants. ” The company said it would also explore a variety of new restaurant models, including different store designs or services.

“We plan to continue to develop emerging brands and focus on exploring appropriate business models, product innovation and operational upgrading for these emerging brands. In the future, we will continue to seek opportunities for core and emerging brands to enrich the store portfolio of franchise stores. ” Yum China said.

Secondly, about 45% (i.e. about HK $8673 million) will be invested in: (I) digitization and supply chain; (II) food innovation and value orientation; (III) quality assets. For example, the company mentioned plans to invest in digitization, automation and artificial intelligence, and will continue to introduce innovative technologies and new takeout dishes for takeout services.

Finally, yum China said that about 10% (or about HK $1.928 billion) would be used for working capital and general corporate purposes.  

Compared with the documents after the hearing, we can see that in the prospectus released today, yum! China also newly disclosed the equity structure after the completion of the global offering (assuming that the equity of all major shareholders remains unchanged, the over allotment rights have not been exercised, and no additional common shares are issued under the 2016 plan, the first batch of warrants or the second batch of warrants), as follows:

According to the disclosure of the prospectus, the list of directors and senior management of the major shareholders is as follows:

We can see that Hu Zuliu, founder and chairman of Chunhua capital, who has a good relationship with Alibaba, serves as the chairman of Yum China. In addition, in the board, in addition to Yum China’s CEO Qu Cuirong, there are also partners in high banyan capital investment, former WAL-MART China president and CEO Chen Yaochang, the chief financial officer of ant group Han Xinyi, and the former Wei Lai automobile CFO Xie Dongying, who has invested in many projects such as Kwai Tsien and so on.

The status of “the lake and the lake”

Through the prospectus, we can also have a glimpse of the “weight” of the catering giant with more than 10000 stores in the overall Chinese catering market.

According to the frost Sullivan report quoted in the prospectus, in the highly fragmented Chinese catering industry, yum! Brands China is currently the largest catering company in terms of sales volume. By the end of 2019, there are about 6.5-7 million companies in China’s catering industry. Based on the system sales in 2019, the market share of the top five companies in China’s catering industry is less than 5%, of which Yum! Brands ranks first in China with a market share of 1.4%.

In July, the number of restaurants in Yum! Brands in China has exceeded 10000, most of which are KFC and pizza hut. By the end of June, KFC had 6749 restaurants and pizza hut had 2258. In addition, the company also has joffy, covazii and other brands.  

It can be seen that the main catering segments of Yum! Brands in China are KFC’s fast food and Pizza Hut’s leisure catering, which are also the fastest growing segment of all restaurant categories.

According to the prospectus, China’s catering industry can generally be classified into fast food, leisure catering, formal restaurants and others. From 2014 to 2019, the compound annual growth rates of fast food and leisure catering segments are 11.4% and 11.6%, respectively, which is faster than that of China’s overall catering industry, and it is expected to continue to grow rapidly with a compound annual growth rate of 8.3% and 7.9% respectively from 2019 to 2024.

At present, in these two segments of the catering market, yum! Brands China’s market share ranking is still the first in terms of sales.

According to the frost Sullivan report, there are about 3 million to 3.5 million companies in China’s fast food market by the end of 2019. In the highly dispersed Chinese fast food market, the top ten companies have a market share of about 11.3% based on the system sales (including the sales of franchise stores and self operated restaurants) in 2019. Among them, KFC is the largest fast food brand in China, with a market share of about 4.9%.

“KFC mainly competes with Western fast food service catering brands in China, such as McDonald’s, Dexter and Burger King, and we believe that by the end of 2019, KFC has about twice the number of outlets as its closest competitor.” Yum China said.

However, in the fast food market, Chinese food still occupies an absolute advantage. According to the report, the fast food market segment increased from 622.8 billion yuan in 2014 to 1069.2 billion yuan in 2019, and is expected to increase to 159.8 billion yuan in 2024. In 2019, Western food accounted for 25.5% of China’s fast food market, while Chinese food accounted for 70.7%. From 2019 to 2024, the CAGR of Western food is expected to be 8.7%, while that of Chinese food is 8.2%.

As for China’s leisure catering market, it is more dispersed. By the end of 2019, there are about 750000 to 780000 companies in China’s leisure catering market. Based on the system sales in 2019, the market share of the top ten companies is about 4.7%, of which pizza hut is the largest leisure catering brand in China, with a market share of 2.7%.

In terms of the number of restaurants in 2019, pizza hut is also the largest leisure catering brand. “We believe that by the end of 2019, the number of restaurants in Pizza Hut will be about five times that of China’s closest Western casual food and beverage competitor.” Yum said in China.

Snack generation noticed that the second largest market share was also the catering brand of Yum! Brands in China. According to the prospectus, based on the system sales volume in 2019, Huang Jihuang is the second largest leisure catering brand in China, with a market share of 0.5%, and the second largest leisure catering brand based on the number of restaurants in 2019.

Strategy and risk

On the whole, China’s catering market, which is more than 4 trillion yuan, is expected to continue to grow, which also gives the driving force for the growth of China’s catering industry, including Yum Brands.

Data show that the market size of China’s catering industry has grown steadily in the past few years, from 2892.6 billion yuan in 2014 to 4672.1 billion yuan in 2019, with a compound annual growth rate of 10.1% during this period. From 2019 to 2024, it is expected to increase to 6613.6 billion yuan at a compound annual growth rate of about 7.2%, which is mainly driven by the rise of household expenditure, the increase of urbanization rate and the strong growth of takeout services.

When talking about the future business strategy, yum China said in the prospectus that the main strategy is to increase the sales and profits of the brand portfolio through endogenous growth, development of franchise mode, new restaurant brand concept and online business.

Business income of Yum! Brands in China

Revenue, profit and profit margin of Yum! Brands in China

“We plan to implement our basic business strategy through the following aspects: (I) continuing to strategically expand the restaurant network; (II) continuing to improve performance at the single store level and exploring new revenue sources; (III) continuing to adhere to technology investment, focusing on improving digital and distribution capabilities; (IV) strategically expanding the restaurant portfolio; and (V) prudently investing in quality assets.” The company said.

In the first place is to open a shop, which is also one of the main purposes of the fund-raising. Among them, snack generation noted that Yum China also disclosed the proportion of franchise stores. “On June 30, 2020, after the merger of Huang Jihuang, about 15% of our restaurants are operated by franchisees.” The company said it plans to continue to enrich its store portfolio in the future, especially in specific channels such as gas stations.  

While full of growth opportunities, yum China also listed a number of risk factors in its prospectus.

For example, the company noted that its restaurant operations are governed by the terms of the master franchise agreement and that if the master franchise agreement is terminated or restricted, its business, operating performance and financial condition will be significantly and adversely affected.

“According to the master franchise agreement, we are required to meet the sales growth target,” Yum China pointed out, noting that Yum has the right to terminate the master franchise agreement in the event that the sales growth target is not up to standard. However, the company did not disclose Yum’s sales growth target requirements at the same time.

“If KFC, Pizza Hut and Taco Bell fail to meet the sales growth targets for two consecutive times, Yum will have the right to revoke or modify the exclusive franchise granted to us, and further develop relevant catering brands in our franchise area, or authorize one or more third parties to develop relevant catering brands.” The company said.

Yum China, which is still expanding rapidly, also mentioned the potential risks of the new restaurant. Our growth strategy depends on our ability to open new restaurants in China. We cannot guarantee that we or our franchisees will be able to achieve our expansion goals or that the operation of the new restaurant will be profitable. ” The company said.

In addition, yum China also talked about the growth strategy of independent boutique coffee brand coffei & joy. According to the company, the success of coffei & Joy depends to a large extent on finding the best location, introducing new and unique store forms, and the profitability of operating such stores.

It is worth noting that Yum China also listed the risk factors related to the acquisition. In May 017, it acquired the controlling right of Jiajia.

When it comes to the risks brought about by fierce industry competition, yum! China also mentioned that it is also facing more and more fierce competition due to the convergence of services in grocery stores, convenience stores, deli stores and restaurants (including convenient foods such as pizza and staple food with side dishes provided by the grocery industry).

As of today’s press release, yum China’s market value was about $21.9 billion, and its share price was more than $58.

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