Yum China (9987.HK): Balanced progress against sector headwinds

Yum China announced its 3Q26 results (3 November) with a set of mixed readings: quarterly revenue increased by 8% y-y to USD3.48bn (up by 2% y-y on a currency-neutral basis), slightly lower than the Bloomberg consensus of USD3.51bn; quarterly operating profit improved by 13% y-y to USD451mn (up by 6% y-y ex-FX), marginally higher than consensus of USD449mn. Same-store sales for both the KFC and Pizza Hut brands in 3Q26 were down by 3% y-y, on the back of 5% and 8% y-y drops in ticket average. On the positive side, management increased its FY26E store net addition guidance to 2.4k from 1.9k previously, after opening 692 net new stores in 3Q26, a historical high; restaurant margins of both KFC and Pizza Hut improved by 10bp to 18.6% and 190bp to 15.3% y-y respectively. We slightly cut our FY26-28F earnings forecasts by 1-2% and lower our target price for YUMC to HKD445.00 (from HKD464.00), based on 10x unchanged forward 12-month EV/EBITDA, while reiterating our Buy rating.