On Wednesday, China Galaxy International initiated coverage on Yum China Holdings (NYSE:YUMC) with a favorable Add rating. The firm established a Discounted Cash Flow (DCF)-based price target of HK$454, which is predicated on a Weighted Average Cost of Capital (WACC) of 10.3% and a Terminal Growth (TG) rate of 3%. This target suggests a forward Price-to-Earnings (P/E) ratio of 29.7 times for fiscal year 2024.
The rationale behind the optimistic outlook for Yum China is its strong market presence in China, the recognition of its brand on a global scale, and the efficiency of its business operations. According to the firm, Yum China's shares are currently trading at a P/E ratio of 18.8 times for calendar year 2024 forecasts, which is considered low compared to the average P/E ratio of 31 times for its international counterparts.
China Galaxy International pointed out that Yum China's valuation is appealing at its current level. The firm anticipates that potential triggers for a positive re-rating of the stock could include system sales and same-store sales growth (SSSG) that outperforms expectations in the first quarter of fiscal 2024.
However, the firm also noted risks that could impact the stock's performance. These include rising labor and occupancy costs, as well as increased competition within the market. These factors are seen as potential downsides that investors should consider.
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