Strong 2Q results with consecutive growth – Yum China, the operator of KFC and Pizza Hut in mainland China, achieved its ninth consecutive quarter of growth in system sales (+6% YoY), operating profit (US$348mn, +14% YoY), and operating margin (11.1%, +20 bps YoY), while revenue rose 13% to US$3.1bn (6% ex‑FX). This strong momentum was partly driven by ongoing store expansion. At the same time, same‑store sales growth (SSSG) turned positive at +1%, with both new and mature stores contributing to growth. Sales from delivery climbed further to 54% of total (2Q25: 45%). Higher rider costs were largely absorbed through operational efficiencies, keeping restaurant margin stable YoY.

Store expansion on track - Net new stores reached 1,196 in 1H26 (2Q26: 560), representing ~63% of the full‑year target of 1,900. The company is well on track to its FY26 goal of 20,000 stores. Franchisees accounted for 41% of new openings, within the 40%–50% target range aimed at margin improvement. Total stores stood at 19,297 as of 30 June 2026, underscoring the company's robust expansion momentum.

New store formats paying off – Beyond store count, diversified formats are also gaining traction and delivering tangible results. KCOFFEE Cafe and KPRO each generate MSD sales uplift and ~20% incremental sales for their parent KFC stores. Pizza Hut Burger Bar delivers double‑digit incremental sales with minimal capex, targeting 500–600 locations by end‑2026 (currently >200). These innovations boost parent store performance under spill‑over benefits, reinforcing company's growth sustainability.

Pizza Hut acquisition enhances earnings – The full acquisition of the Pizza Hut brand in China eliminates future royalty payments (previously 3% of sales) to Yum! Brands (YUM US), with completion expected in 3Q26. The savings will directly lift profit and margin, bringing Pizza Hut's margin closer to KFC's level – a significant positive catalyst. The deal also lowers the bar for new store openings, prompting management to raise its annual net new store target to 800+ over the next two years (up from 600+), further fuelling long‑term growth.

Our view:

We remain positive on Yum China. While 2H26 will face a high base effect from last year’s delivery subsidies, we believe the company's strategic advantages will continue to drive outperformance to peers. Pizza Hut, once a laggard, is now showing clear recovery post‑acquisition of the brand and from its burger format spill‑over. The ambitious 2030 target of 30,000 stores (implying ~2,500 net new stores per year, up ~32% from this year's 1,900) underscores Mgt's confidence and offers substantial topline upside, supported by a healthy payback period of 2–3 years.

The company declared a dividend of US$0.29 per share for 2Q26, and the stock is currently trading at 16x FY26E P/E with an estimated yield of ~2.4%. (Amelia Deng)