China Leaves Sour Taste at Yum Brands; Dependency on the Country Has Come Home to Roost After Poultry Scandal There

July 9, 2013, 6:53 p.m. ET

China Leaves Sour Taste at Yum Brands

Dependency on the Country Has Come Home to Roost After Poultry Scandal There



While not quite putting all its eggs in one basket, fast-food chain Yum Brands Inc.YUM +0.70% has leaned heavily on the popularity of fried chicken in China. That dependency has come home to roost in recent months as a poultry scandal in late 2012 and then an avian-flu outbreak this spring drove customers away. Although KFCs in China account for just over a 10th of Yum’s restaurant count globally, it owns all of them and they are the bulk of a Chinese business that contributed 42% of Yum’s “segment profit” in 2012. Restaurants elsewhere are largely franchised and have less earnings impact.Second-quarter earnings per share, due Wednesday, now are expected to be 54 cents—almost 30% less than what analysts expected in December, according to FactSet. Yum earned 69 cents in the period a year earlier.

Yum’s bet on China is too important for the incidents to affect its strategy there. Nor are its woes substantial enough to permanently derail the global company’s growth. To drive that home, the cover of its annual report this spring featured a photo of the Great Wall with the caption, “China and a Whole Lot More.”

And there is reason to hope KFC in China is turning the corner. Sales fell 36% year over year in April, when avian-flu cases were peaking, but by only 25% in May. Yum predicts a turnaround by the fourth quarter of this year.

The more pertinent issue: Are investors now overpaying for growth even after the shares lagged behind the market following the poultry problem? The stock trades at more than 23 times the next 12 months’ forecast earnings. That is about a fifth more expensive than on average over the past decade even though Yum will have a hard time matching that period’s strong results.

True, there are more growth markets besides China. Yum points out that it has 58 restaurants per million people in the U.S. and just two per million in the 10 largest emerging markets combined.

But competitors such as McDonald’s Corp. MCD +0.11% are making the same bet. And countries such as India, while huge, aren’t nearly as receptive to fast food. Even Yum’s 15% long-term growth target in China seems iffy.

For investors, fast food may be slower than believed.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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