Yum China Holdings Stock

Yum China Holdings, Inc. and its subsidiaries (Yum China) operate as a restaurant company in the People’s Republic of China (China or PRC).

The KFC, Pizza Hut, Taco Bell, Lavazza, Little Sheep and Huang Ji Huang brands are collectively referred to as the ‘brands’ or ‘concepts’.

The company’s growing restaurant network consists of its flagship KFC and Pizza Hut brands, as well as emerging brands, such as Taco Bell, Lavazza, Little Sheep and Huang Ji Huang.

The company has the exclusive right to operate and sublicense the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands in China, excluding Hong Kong, Macau and Taiwan. The company owns the intellectual property of the Little Sheep and Huang Ji Huang concepts outright. The company has developed extensive operating experience in the China market.

As of December 31, 2022, the company owned and operated approximately 86% of its restaurants.

Restaurant Concepts

KFC

KFC is the leading and the largest quick-service restaurant (‘QSR’) brand in China in terms of 2022 system sales. There are KFC restaurants in more than 1,800 cities across China. In addition to Original Recipe chicken and other chicken products, KFC in China has an extensive menu featuring beef burgers, pork, seafood, rice dishes, congees, fresh vegetables, desserts, coffee, tea and many other products. KFC also seeks to increase revenue from different channels, including dine-in, delivery, takeaway and packaged foods, such as steak, fried rice and pasta. KFC primarily competes with western QSR brands in China, such as McDonald’s, Dicos and Burger King.

Pizza Hut

Pizza Hut is the leading and the largest casual dining restaurant (‘CDR’) brand in China in terms of 2022 system sales and number of restaurants as of December 31, 2022, offering multiple dayparts, including breakfast, lunch, afternoon tea and dinner. There are Pizza Hut restaurants in over 650 cities across China. Pizza Hut has an extensive menu offering a broad variety of pizzas, steaks, pasta, rice dishes and other entrees, appetizers, beverages and desserts. Pizza Hut also aims to further drive growth from different channels and occasions, including dine-in, delivery, takeaway and packaged foods, such as steak and pasta.

Other Concepts

In addition to KFC and Pizza Hut, the company’s restaurant brand portfolio also includes Taco Bell, Lavazza, Little Sheep and Huang Ji Huang.

Taco Bell: Taco Bell is the world’s leading western QSR brand specializing in Mexican-style food, including tacos, burritos, quesadillas, salads, nachos and similar items.

Lavazza: In April 2020, the company partnered with Luigi Lavazza S.p.A. (‘Lavazza Group’), the world-renowned family-owned Italian coffee company, and established a joint venture (‘Lavazza joint venture’), to explore and develop the Lavazza coffee concept in China. In September 2021, the company and Lavazza Group entered into agreements to accelerate the expansion of Lavazza coffee shops, which offer a premium and authentic Italian coffee experience in China.

Little Sheep: Little Sheep, with its roots in Inner Mongolia, China, specializes in ‘Hot Pot’ cooking, which is very popular in China, particularly during the winter months. Little Sheep has units in both China and international markets.

Huang Ji Huang: In April 2020, the company completed the acquisition of a controlling interest in Huang Ji Huang. Huang Ji Huang primarily operates a franchise model and is an industry-leading simmer pot brand.

Strategies

The company’s primary strategy is to grow sales and profits across its portfolio of brands through organic growth, growth of franchise restaurants and development of new restaurant concepts, along with growing the company’s online business. The company is accelerating its store network expansion to reach the company’s next milestone of 20,000 stores. The company will drive growth from its core brands, as well as emerging brands, such as Taco Bell and Lavazza. The company will continue to invest in digitalization and supply chain, the company’s key growth enablers.

The company’s strategies are to continue to strategically expand the company’s restaurant network, such as further expand geographical coverage, explore new restaurant formats, capture franchise opportunity, and grow emerging brands; continue to improve unit-level performance and develop new sources of revenue, such as food innovation and value proposition, daypart opportunities, and best in-store experience; continue to invest in technology, with a focus to capture digital, delivery and off-premise consumption opportunities; strategically optimize the company’s restaurant portfolio; and prudently pursue investments in high-quality assets.

Supply Chain Management

The company’s restaurants, including those operated by franchisees, are large purchasers of a number of food and paper products, equipment and other restaurant supplies. The principal items purchased include protein ingredients (including poultry, pork, beef and seafood), cheese, oil, flour, vegetables and paper and packaging materials.

The company partners with over 800 independent suppliers, which are mostly China-based. The company has formulated detailed specifications for food ingredients and consumables the company procures.

The company, along with multiple independently owned and operated distributors, utilizes 33 logistics centers to distribute supplies to company-owned and franchised stores, as well as to third-party customers. In addition, the company owns seasoning facilities for its Chinese dining business unit, which manufacture and sell seasoning products to Huang Ji Huang and Little Sheep franchisees.

Government Regulation

The company is subject to Chinese regulations on loans to and direct investment in Chinese entities by offshore holding companies. Thus, loans by the company to its wholly-owned Chinese subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterparts of the State Administration of Foreign Exchange (‘SAFE’).

The company is subject to regulations relating to certain investments and acquisitions relating to businesses in China, including under the PRC Anti-monopoly Law and the Provisions of the Ministry of Commerce on M&A of a Domestic Enterprise by Foreign Investors jointly adopted by six PRC regulatory agencies, including MOFCOM, the State-Owned Assets Supervision and Administration Commission, the Chinese State Taxation Administration (‘STA’), the State Administration for Industry and Commerce of the People’s Republic of China, the China Securities Regulatory Commission (‘CSRC’), and SAFE.

The company is subject to cybersecurity regulations, including those enforced by the Cyberspace Administration of China (‘CAC’), including the PRC Cybersecurity Law, which imposes tightened requirements on data privacy and cybersecurity practices, the PRC Data Security Law, which imposes data security and privacy obligations on entities and individuals carrying out data activities (including activities outside of the PRC), requires a national security review of data activities that may affect national security, and imposes restrictions on data transmissions, the PRC Personal Information Protection Law, which sets out the regulatory framework for handling and protection of personal information and transmission of personal information, among others.

Intellectual Property

The company’s use of certain material trademarks and service marks is governed by a master license agreement between Yum Restaurants Consulting (Shanghai) Company Limited (‘YCCL’), a wholly-owned indirect subsidiary of the company, and Yum! Brands Inc. (‘YUM’), through YRI China Franchising LLC, a subsidiary of YUM, effective from January 1, 2020 and previously through Yum! Restaurants Asia Pte. Ltd., another subsidiary of YUM, from October 31, 2016 to December 31, 2019.

Pursuant to the master license agreement, the company is the exclusive licensee of the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands and their related marks and other intellectual property rights for restaurant services in the PRC, excluding Hong Kong, Macau and Taiwan.

The company owns registered trademarks and service marks relating to the Little Sheep, Huang Ji Huang, COFFii & JOY and East Dawning brands.

Competition

KFC’s competitors in China are primarily western QSR brands such as McDonald’s, Dicos and Burger King, and to a lesser extent, domestic QSR brands in China. Pizza Hut primarily competes with western CDR brands, including Domino’s and Papa John’s, as well as other domestic CDR brands in China.

Seasonality

Due to the nature of the company’s operations, the company typically generates higher sales during Chinese festivities, holiday seasons, as well as summer months, but relatively lower sales and lower operating profit during the second and fourth quarters (year ended December 2022).

Research and Development

The company’s research and development expenses were $6 million in 2022.

History

Yum China Holdings, Inc. was incorporated in Delaware in 2016.