Yum China (9987.HK): Pre-3Q: Muted SSSG, but margins remain supported

This report is Deutsche Bank's pre-3Q26 preview on Yum China (9987.HK). Reflecting the mixed impacts of mild SSSG pressure in 3Q and the completion of Pizza Hut (PZH) brand ownership in August, we expect YUMC's 3Q26 total revenue to increase by high-single digits (HSD) YoY (FX-neutral) and NP at ~USD300+mn (up low-single digits YoY). Despite YUMC's diverse promotional activities and marketing campaigns, company-level SSSG may slightly decrease YoY amid unfavourable weather impact and a weak macroeconomic environment, along with around 500 net new store openings in Q326. We expect 3Q26 restaurant margin to rise by c0.3ppt: the license fee savings from PZH brand ownership and sustained operational efficiency improvements should outweigh continued labor cost headwinds. We expect 3Q26 OPM to increase by 0.1ppt YoY, while NPM is projected to drop by 0.1ppt, mainly due to a potentially higher G&A cost ratio (i.e. discontinued government subsidies) and lower interest income. Company updates: