{"id":15879,"date":"2015-06-02T16:06:40","date_gmt":"2015-06-02T21:06:40","guid":{"rendered":"http:\/\/news.medill.northwestern.edu\/chicago\/?p=15879"},"modified":"2015-06-03T15:24:56","modified_gmt":"2015-06-03T20:24:56","slug":"yums-decision-in-china-to-dump-or-not-to-dump","status":"publish","type":"post","link":"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/","title":{"rendered":"Yum’s decision in China: To dump or not to dump"},"content":{"rendered":"

Updated June 3 with comment from OSI Group LLC<\/em><\/p>\n

By Yimian Wu<\/p>\n

Hedge funds such as Third Point and Corvex Management favor Yum! Brands Inc., for one thing: China. But activist investors propose\u00a0divesting\u00a0Yum’s China division, which generates half\u00a0Yum’s revenue, as a giant franchisee that would\u00a0pay big,\u00a0steady royalty fees.<\/p>\n

According to Bloomberg<\/a>, the founder of activist hedge fund Corvex Management, Keith Meister, said at\u00a0a recent Sohn Investment Conference in New York that\u00a0spinning off Yum\u2019s Chinese business could create additional value of $16 per share.<\/p>\n

<\/p>\n

Currently traded at $90.32, the Louisville-based global fast-food\u00a0operator consists of five operating segments: Yum China, Yum India, KFC, Pizza Hut and Taco Bell. Yum India includes all operations in India, Bangladesh, Nepal and Sri Lanka.\u00a0\u00a0T he company also owns\u00a0a controlling interest in Little Sheep Group Ltd., a casual dining chain, acquired in 2012.<\/p>\n

Based in Shanghai, Yum China has 6,846 primarily company-owned restaurants, including 4,896 KFCs and 1,369 Pizza Hut casual dining restaurants, and 270 Pizza Hut home delivery units, after adding 171 units in the first\u00a0quarter.<\/p>\n

In 2014 the China division reported revenues of approximately $6.9 billion, accounting for 52 percent of the company\u2019s total revenue, and operating profit of $713 million, 35 percent of the company\u2019s operating profit.<\/p>\n

\u201cThere are certain merits to spin off Yum\u2019s China,\u201d said RJ Hottovy, director of equity research at Morningstar, in a phone interview. \u201cIt is a largely self-contained ecosystem where you have your own separate infrastructure and real estate as well as training.\u201d<\/p>\n

On the risk side, he said, \u201cYou can sacrifice some shared knowledge with the rest of the system. Also, the stand-alone business will incur extra costs.\u201d<\/p>\n

He added that the spinoff wouldn\u2019t happen in the near term but possibly within the next couple of years. Hottovy thinks the stock is \u201cfairly valued.\u201d<\/p>\n

John Glass, an analyst at Morgan Stanley, said in a May 18 note that the hypothetical plan to spin off China is \u201cskeptical\u201d as the independent KFC and Pizza Hut brands do not report to the global brand president. But \u201ca split and conversion into a master franchisee makes more sense\u201d because Yum China would have the right to build and operate in China but still be subject to Yum\u2019s non-China franchisee rules.<\/p>\n

Glass has a hold rating with a target price of $82.<\/p>\n

John Ivankoe, an analyst at JPMorgan Chase & Co., said in a May 15 note that the spinoff of China has moved from a \u201cpossibility\u201d to a \u201cprobability.\u201d He wrote: \u201cOur sense is Yum is not being defensive against activist investors\u2019 recent points, and in fact seems to welcome ideas that can drive short and long term shareholder value.”<\/p>\n

He also upgraded his target price to $105 from $83.<\/p>\n

Aiming at growing franchises <\/strong><\/h3>\n

According to the company\u2019s annual report, nearly 100 percent of Pizza Hut\u2019s China units, none of the India units and 6 percent of the units outside China and India are company-owned. Also, 77 percent of KFC\u2019s China units, 51 percent of the India units and 9 percent of the units outside China and India are company-owned.<\/p>\n

During the company\u2019s fourth quarter call on February 5, Chief Financial Officer\u00a0Pat Grismer said the company will pick up the pace of franchise development and refranchising, converting company-owned businesses to franchised units.\u00a0Yum expects to be approximately 10 percent franchised in China and 85 percent to 90 percent franchised in India by 2017.<\/p>\n

Hottovy said franchising is a \u201cmuch more capital-effective way\u201d of running a business because it allows the company to put more responsibility on franchisees. “The market for conventional franchising hasn\u2019t been there until recently in this region, but that\u2019s something will create value for shareholders,\u201d he said.<\/p>\n

Hit by the scandal <\/strong><\/h3>\n

On July 20, 2014, an undercover report in China\u00a0accused meat supplier Shanghai Husi Food Co Ltd., a unit of Aurora, Ill.-based OSI Group LLC,\u00a0of using expired meat in its food processing plant. Yum was hit hard by the\u00a0accusation,\u00a0along with other \u00a0Western fast-food chains such as McDonald\u2019s, Starbucks and Subway. UPDATE: OSI today (June 3) responded: “To date, this allegation has not been proven.”<\/p>\n

In the third quarter last year, same-store sales dropped 14 percent in KFC China after the scandal. The fourth quarter experienced an even sharper decline of 16 percent.<\/p>\n

However, KFC is slowly recovering. In the first quarter ended March 21, the company reported a narrower same-store decline of 12 percent\u00a0and its stock gained 81 cents per share.<\/p>\n

The company expects to take six to nine months to recover from the scandal. Most analysts think\u00a0it will not have a long-term negative affect on the brand.<\/p>\n

\u201cThis is probably the sixth or seventh one we have seen in the last 10 years. The scandal hit everybody last year so I don\u2019t think it will have a lasting effect,\u201d said Hottovy.<\/p>\n

Yum has survived previous scares. The avian flu in China\u00a0alarmed consumers in 2013.\u00a0A year earlier\u00a0an investigation showed some of KFC\u2019s poultry farmers used excessive levels of antibiotics in chicken. A decade ago, KFC was found using Sudan 1, a red dye that can cause cancer, in its chicken wings.<\/p>\n

However, a survey conducted by UBS indicated that the supplier incidents have not caused long-term brand impairment and customers aren\u2019t blaming restaurant operators generally, according to analyst Keith Siegner\u2019s note on April 30.<\/p>\n

Slowly recovering <\/strong><\/h3>\n

CEO Greg Creed said in the first quarter earnings release that\u00a0the company aims at delivering a full-year EPS growth of at least 10 percent and is confident about\u00a0a recovery in China.<\/p>\n

Analysts have an EPS consensus of $3.46 for the full year, compared with $2.32\u00a0 in 2014,\u00a0and the average target price is $90.74, according to Bloomberg.<\/p>\n

KFC\u2019s recovery efforts included new menu offerings and discounted coffee. According to Siegner, eight new products including\u00a0such healthier\u00a0items as herbal tea and seafood are in the new menu. KFC also offers coffee priced at 40 percent below Starbucks and 20 percent below McCafe to boost sales.<\/p>\n

Seeing a potential faster-than-expected recovery,\u00a0Siegner rates the stock a buy with a target price of $100.<\/p>\n

Andrew Charles, a research analyst at Cowen and Co., said in an e-mail that KFC\u2019s launch of coffee was \u201ca good complement\u201d to build its breakfast business as KFC faces less competition during breakfast hours.<\/p>\n

But even though KFC seems \u201cpoised\u201d about its recovery in the second half of the year, Charles is concerned with increased competition and government involvement against Western companies to level the playing filed for local competitors.<\/p>\n

He has a hold rating with a target price of $84.<\/p>\n

Photo at top:\u00a0Yum’s China division opened 171 new units during the first quarter. (SAMZ\/Creative Commons<\/a>)<\/div>\n","protected":false},"excerpt":{"rendered":"

Updated June 3 with comment from OSI Group LLC By Yimian Wu Hedge funds such as Third Point and Corvex Management favor Yum! Brands Inc., for one thing: China. But activist investors propose\u00a0divesting\u00a0Yum’s China division, which generates half\u00a0Yum’s revenue, as a giant franchisee that would\u00a0pay big,\u00a0steady royalty fees. According to Bloomberg, the founder of activist […]<\/p>\n","protected":false},"author":139,"featured_media":15883,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[27,436],"tags":[],"class_list":["post-15879","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business","category-spring-2015"],"yoast_head":"\nYum's decision in China: To dump or not to dump - Medill Reports Chicago<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Yum's decision in China: To dump or not to dump - Medill Reports Chicago\" \/>\n<meta property=\"og:description\" content=\"Updated June 3 with comment from OSI Group LLC By Yimian Wu Hedge funds such as Third Point and Corvex Management favor Yum! Brands Inc., for one thing: China. But activist investors propose\u00a0divesting\u00a0Yum’s China division, which generates half\u00a0Yum’s revenue, as a giant franchisee that would\u00a0pay big,\u00a0steady royalty fees. According to Bloomberg, the founder of activist […]\" \/>\n<meta property=\"og:url\" content=\"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/\" \/>\n<meta property=\"og:site_name\" content=\"Medill Reports Chicago\" \/>\n<meta property=\"article:published_time\" content=\"2015-06-02T21:06:40+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2015-06-03T20:24:56+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/s3.amazonaws.com\/medill.wordpress.offload\/WP%20Media%20Folder%20-%20medill-reports-chicago\/wp-content\/uploads\/sites\/3\/2015\/06\/kfc-.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1100\" \/>\n\t<meta property=\"og:image:height\" content=\"825\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"yimianwu\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"yimianwu\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"5 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/\",\"url\":\"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/\",\"name\":\"Yum's decision in China: To dump or not to dump - Medill Reports Chicago\",\"isPartOf\":{\"@id\":\"https:\/\/news.medill.northwestern.edu\/chicago\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/#primaryimage\"},\"image\":{\"@id\":\"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/s3.amazonaws.com\/medill.wordpress.offload\/WP%20Media%20Folder%20-%20medill-reports-chicago\/wp-content\/uploads\/sites\/3\/2015\/06\/kfc-.jpg\",\"datePublished\":\"2015-06-02T21:06:40+00:00\",\"dateModified\":\"2015-06-03T20:24:56+00:00\",\"author\":{\"@id\":\"https:\/\/news.medill.northwestern.edu\/chicago\/#\/schema\/person\/bec5516dc1df1d98f4a4fef3f3faa6db\"},\"breadcrumb\":{\"@id\":\"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/\"]}]},{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/#primaryimage\",\"url\":\"https:\/\/s3.amazonaws.com\/medill.wordpress.offload\/WP%20Media%20Folder%20-%20medill-reports-chicago\/wp-content\/uploads\/sites\/3\/2015\/06\/kfc-.jpg\",\"contentUrl\":\"https:\/\/s3.amazonaws.com\/medill.wordpress.offload\/WP%20Media%20Folder%20-%20medill-reports-chicago\/wp-content\/uploads\/sites\/3\/2015\/06\/kfc-.jpg\",\"width\":1100,\"height\":825,\"caption\":\"Yum's China Division opened 171 new units during the first quarter.\"},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/news.medill.northwestern.edu\/chicago\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Yum’s decision in China: To dump or not to dump\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/news.medill.northwestern.edu\/chicago\/#website\",\"url\":\"https:\/\/news.medill.northwestern.edu\/chicago\/\",\"name\":\"Medill Reports Chicago\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/news.medill.northwestern.edu\/chicago\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/news.medill.northwestern.edu\/chicago\/#\/schema\/person\/bec5516dc1df1d98f4a4fef3f3faa6db\",\"name\":\"yimianwu\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/news.medill.northwestern.edu\/chicago\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/53800c228d57eb156024a7b07ce33cd3d226b4a58d0b29801ba69f45934cd51f?s=96&d=mm&r=g\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/53800c228d57eb156024a7b07ce33cd3d226b4a58d0b29801ba69f45934cd51f?s=96&d=mm&r=g\",\"caption\":\"yimianwu\"},\"url\":\"https:\/\/news.medill.northwestern.edu\/chicago\/author\/yimianwu\/\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Yum's decision in China: To dump or not to dump - Medill Reports Chicago","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/","og_locale":"en_US","og_type":"article","og_title":"Yum's decision in China: To dump or not to dump - Medill Reports Chicago","og_description":"Updated June 3 with comment from OSI Group LLC By Yimian Wu Hedge funds such as Third Point and Corvex Management favor Yum! Brands Inc., for one thing: China. But activist investors propose\u00a0divesting\u00a0Yum’s China division, which generates half\u00a0Yum’s revenue, as a giant franchisee that would\u00a0pay big,\u00a0steady royalty fees. According to Bloomberg, the founder of activist […]","og_url":"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/","og_site_name":"Medill Reports Chicago","article_published_time":"2015-06-02T21:06:40+00:00","article_modified_time":"2015-06-03T20:24:56+00:00","og_image":[{"width":1100,"height":825,"url":"https:\/\/s3.amazonaws.com\/medill.wordpress.offload\/WP%20Media%20Folder%20-%20medill-reports-chicago\/wp-content\/uploads\/sites\/3\/2015\/06\/kfc-.jpg","type":"image\/jpeg"}],"author":"yimianwu","twitter_card":"summary_large_image","twitter_misc":{"Written by":"yimianwu","Est. reading time":"5 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebPage","@id":"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/","url":"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/","name":"Yum's decision in China: To dump or not to dump - Medill Reports Chicago","isPartOf":{"@id":"https:\/\/news.medill.northwestern.edu\/chicago\/#website"},"primaryImageOfPage":{"@id":"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/#primaryimage"},"image":{"@id":"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/#primaryimage"},"thumbnailUrl":"https:\/\/s3.amazonaws.com\/medill.wordpress.offload\/WP%20Media%20Folder%20-%20medill-reports-chicago\/wp-content\/uploads\/sites\/3\/2015\/06\/kfc-.jpg","datePublished":"2015-06-02T21:06:40+00:00","dateModified":"2015-06-03T20:24:56+00:00","author":{"@id":"https:\/\/news.medill.northwestern.edu\/chicago\/#\/schema\/person\/bec5516dc1df1d98f4a4fef3f3faa6db"},"breadcrumb":{"@id":"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/"]}]},{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/#primaryimage","url":"https:\/\/s3.amazonaws.com\/medill.wordpress.offload\/WP%20Media%20Folder%20-%20medill-reports-chicago\/wp-content\/uploads\/sites\/3\/2015\/06\/kfc-.jpg","contentUrl":"https:\/\/s3.amazonaws.com\/medill.wordpress.offload\/WP%20Media%20Folder%20-%20medill-reports-chicago\/wp-content\/uploads\/sites\/3\/2015\/06\/kfc-.jpg","width":1100,"height":825,"caption":"Yum's China Division opened 171 new units during the first quarter."},{"@type":"BreadcrumbList","@id":"https:\/\/news.medill.northwestern.edu\/chicago\/yums-decision-in-china-to-dump-or-not-to-dump\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/news.medill.northwestern.edu\/chicago\/"},{"@type":"ListItem","position":2,"name":"Yum’s decision in China: To dump or not to dump"}]},{"@type":"WebSite","@id":"https:\/\/news.medill.northwestern.edu\/chicago\/#website","url":"https:\/\/news.medill.northwestern.edu\/chicago\/","name":"Medill Reports Chicago","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/news.medill.northwestern.edu\/chicago\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/news.medill.northwestern.edu\/chicago\/#\/schema\/person\/bec5516dc1df1d98f4a4fef3f3faa6db","name":"yimianwu","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/news.medill.northwestern.edu\/chicago\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/53800c228d57eb156024a7b07ce33cd3d226b4a58d0b29801ba69f45934cd51f?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/53800c228d57eb156024a7b07ce33cd3d226b4a58d0b29801ba69f45934cd51f?s=96&d=mm&r=g","caption":"yimianwu"},"url":"https:\/\/news.medill.northwestern.edu\/chicago\/author\/yimianwu\/"}]}},"_links":{"self":[{"href":"https:\/\/news.medill.northwestern.edu\/chicago\/wp-json\/wp\/v2\/posts\/15879","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/news.medill.northwestern.edu\/chicago\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/news.medill.northwestern.edu\/chicago\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/news.medill.northwestern.edu\/chicago\/wp-json\/wp\/v2\/users\/139"}],"replies":[{"embeddable":true,"href":"https:\/\/news.medill.northwestern.edu\/chicago\/wp-json\/wp\/v2\/comments?post=15879"}],"version-history":[{"count":0,"href":"https:\/\/news.medill.northwestern.edu\/chicago\/wp-json\/wp\/v2\/posts\/15879\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/news.medill.northwestern.edu\/chicago\/wp-json\/wp\/v2\/media\/15883"}],"wp:attachment":[{"href":"https:\/\/news.medill.northwestern.edu\/chicago\/wp-json\/wp\/v2\/media?parent=15879"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/news.medill.northwestern.edu\/chicago\/wp-json\/wp\/v2\/categories?post=15879"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/news.medill.northwestern.edu\/chicago\/wp-json\/wp\/v2\/tags?post=15879"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}