Yum China Holdings (YUMC)

Total return at 5 years: 19.8%/year = 17.3% appreciation + 2.6% dividend. The target price ($95) is ex-dividend; the $8 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $87 · Multiples $83) exceeds the market price ($43).

Today — with margin of safety: at $43 trades ~48.3% below its value discounted to today (~$83) — the wide discount we require (≥38%, equivalent to a ~15% annual return); the risk is covered by the margin, not the rate.

At 5 years — Muy infravalorado: the target price ($95) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years comfortably exceeds the risk-free rate (4.5%) — and the discount reaches the required margin of safety.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($43) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-8.2%/year) than we project (7.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$0.6 bn of owner earnings in year 5 (vs ~$1.4 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on Resultado operativo (EV/EBIT). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Yum China operates company-owned and franchised restaurants in China: the economics are those of a restaurant chain with an exclusive brand license, so it is valued at the enterprise level on EV/EBIT over operating income, which already expenses stock-based compensation (US$43M in the rolling period, 0.3% of revenue and 4.6% of free cash flow: immaterial). Being an enterprise-level valuation, cash (US$1.386 billion) and debt (US$0.066 billion) enter the bridge to equity value. The revenue path starts at 6.5%, half a point above the 6.0% ex-currency of the second quarter of 2026 (13% reported), on the sequential acceleration in system sales across both brands and the more than 1,900 net openings guided for 2026; the differential between the rolling period's reported 8.8% and the quarter's 6.0% is renminbi appreciation and is not baked into the base, it is treated as a separate swing. The end point, 4.3%, combines the store openings the company itself guides —more than 1,900 net in 2026 toward more than 20,000— with comparable sales close to flat and a growing weight of franchises, which add system sales but contribute less own revenue per store. The net margin rises from 7.8% to 8.7% over five years: the company has posted nine consecutive quarters of operating margin expansion and from 7-Aug-2026 it stops paying the license royalty on Pizza Hut, having completed the purchase of the brand in mainland China, an effect partly offset by the interest on the bridge loan (CNH8,400M, ~US$1,200M equivalent, at CNH HIBOR plus a spread, ~2% a year estimated) and by the delivery cost of a mix in which home delivery is already 54% of company sales. Buybacks are modeled explicitly: cash does not accumulate because the return to shareholders exceeds free cash flow, and the share path is bounded by what that flow sustains after the dividend and the amortization of the loan.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $95 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $43, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $95 in 5 years plus $8 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $83. Against the current market price ($43), the margin of safety is 48.3% (trades below the maximum → there is margin) and the total return at that price would be 19.8% annually.

• Entry multiple. Trades at 10× trailing-twelve-month earnings, below the 18-to-24 times exit band the franchised-restaurant archetype justifies for a business with this return on capital.
• Estimated return. +20% annually at market price in the base case, with +17% from appreciation and +3% from the dividend; the adverse scenario returns +20%.
• Entry compression. The entry multiple moves from 10× to 7× by year five of the base path: earnings growth and the share count reduction cheapen the position without the market having to re-rate it.
• Reliance on the multiple. Part of the base-case return comes from the exit multiple exceeding the entry multiple. Earnings per share grow on their own at double digits, so the thesis does not rest on the re-rating alone, but it is not indifferent to it either.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (102%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Cash generation. Operating cash flow of US$1.58bn in the trailing-twelve-month period, stable between US$1.4bn and US$1.6bn over four fiscal years, with free cash flow of US$940M after capex that is largely expansion.
• Return on capital. 24.9% on invested capital of US$4.04bn, in the exceptional band and well above the 10% bar. Invested capital is low because the business is partly funded with supplier credit.
• Reinvestment runway. More than 2,000 cities without KFC identified by the company and a target of more than 30,000 units by 2030: reinvestment at high returns has a known destination, the condition that makes value compound.
• Earnings quality. Stock-based compensation of US$43M, 0.3% of revenue and 4.6% of free cash flow: immaterial, without the distortion that forces a metric correction in other sectors.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Yum China's growth breaks down into units times sales per unit: system sales grow through unit openings, through comparable sales (transactions times average ticket) and through the mix between company-owned and franchised units, which determines how much of that system sales reaches reported revenue. In 2025 the 4% ex-currency system-sales growth split into 3 points from new units and 1 point from comparable sales. Within comparables, the direction comes from transactions — fourteen consecutive quarters of growth — against an average ticket that is declining under the weight of value pricing and single-item orders. The report's segment revenue figures are pre-intersegment eliminations, which is why they sum to more than the consolidated total.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Current pace. Trailing-twelve-month revenue 8.8% above the prior year, reported. The company publishes ex-currency growth only by quarter — 6% in the second quarter of 2026, 13% reported —, with both brands accelerating sequentially.
• Unit openings. 560 net openings in the second quarter of 2026, a record for that period and 67% more than a year earlier, with 41% opened by franchisees.
• Comparable sales. Barely 1%, with transactions up 5% and average ticket down: volume is there, price is not. It is the weak point of growth and the one that weighs most in the adverse scenario.
• Growth quality. Growth is funded with internal cash flow and increasingly with franchisee capital; there are no acquisitions buying revenue nor share issuance diluting it.

• Ten-year relevance. Quick-service and casual dining in the world's most populous market are not a product at risk of obsolescence; the market grew 3% in 2025 and unit density per capita remains well below that of the United States.
• Differentiated product. KFC in China is not the imported brand but a local menu developed over nearly four decades, with ongoing innovation; the differentiation is real even though any single dish is replicable.
• Pricing power. Limited today: average ticket fell 3% at KFC and 11% at Pizza Hut in the second quarter of 2026 on the value-pricing strategy. Volume offsets it, but the company is choosing transactions over price.
• Operating leverage. Nine consecutive quarters of operating margin expansion with revenue growing at a mid-single digit pace: fixed structure is being diluted, though the restaurant margin held flat on delivery cost.
• Capital cycle. Capital is entering the sector: competition for locations and for the value-conscious consumer is intense in China. The exclusive license and logistics scale are what keeps that capital inflow from compressing this company's returns.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0 bn
• ✓Interest coverage (EBIT / interest)57.6x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 102% of ROIC
• ✓Value creation (ROIC − 10% bar)+15pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 1.4x
• –Float / working capitalNeutral WC
• ✓Dilution (SBC % of revenue + shares)SBC 0.3% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Net cash. US$485M of cash plus US$901M of short-term investments against US$66M of debt as of June 30, 2026: net creditor position before the Pizza Hut brand purchase.
• Bridge loan. CNH8,400M (~US$1,200M equivalent) that funded the brand purchase, completed on August 7, 2026: leaves the balance sheet close to neutral and adds interest expense until amortized.
• Coverage of the shareholder return. US$1.68bn returned in the trailing-twelve-month period against US$940M of free cash flow: the excess came from accumulated cash and is not sustainable at the same pace indefinitely.
• Repatriation restriction. China's currency-conversion limitations can constrain the ability to move cash out of the country to pay dividends and buy back shares.

How cash comes in and how it is deployed. In green, the business's own cash (the owner-FCF it generates and reinvests); in gray, the float and credit — customer and funding money, which is not the shareholder's.

Breakdown of cash uses for the trailing twelve months ended June 30, 2026: capex US$638M, dividends US$376M and buybacks US$1,306M. Buybacks dominate the allocation and exceed free cash flow for the period (US$940M), meaning they were also funded with balance-sheet cash: sustainable while there is accumulated surplus, not indefinitely. The purchase of the Pizza Hut brand in mainland China, for which the company disclosed a bridge loan of approximately US$1,200M, closed in August 2026 and therefore does not appear in this breakdown, which corresponds to the trailing-twelve-month period ended June 30, 2026.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Track record. The CEO has spent eight years in the role and fifteen at the group, with the network growing from 7,562 units in 2016 to 19,297 by mid-2026.
• Capital allocation. Reinvests at a 24.9% return on capital and returns the rest: US$1,500M committed for 2026. Buybacks moderated in 2025 on price discipline, not lack of cash.
• Alignment. There is no controlling shareholder nor meaningful management ownership: the CEO's holding is around 0.2% of shares outstanding. Aggregate ownership of the director and officer group was not extracted in this import.
• Candor. The annual report discloses the breach of the sales metric in Pizza Hut, the gap between the 28 Taco Bell units and the 225-unit contractual target, and the two food-safety episodes that hit sales.

• Missing buyers by geography: the company trades in New York and Hong Kong but operates entirely in mainland China, an explicit case of a business that trades in a market different from where it operates, which many mandates exclude by policy rather than by analysis.
• Headline regulatory risk: the Holding Foreign Companies Accountable Act allows delisting if the U.S. accounting regulator cannot inspect the auditor based in China, a situation that already occurred between 2021 and 2022 and was reversed.
• Motivated sellers on license noise: the contractual target of 225 Taco Bell units by the end of 2025 closed at 28 and the renegotiation with the licensor was left open, a headline read as risk to the entire license when it affects a brand with 28 units.
• Restriction on cash outflow: China's currency-conversion limitations weigh on the ability to repatriate cash flow, which discounts the value of the shareholder return even as the company executes it.

The source of the discount is identifiable and positive, not an absence of explanation: less is paid per dollar of earnings because the dollar is earned in China and there is a set of buyers who cannot or will not take that exposure. Geography, the delisting risk under the Holding Foreign Companies Accountable Act, and the currency-conversion restrictions are enough to explain the discount without needing an additional catalyst. What the price does not appear to be discounting, judging by the operating data, is a deterioration of the business: comparable transactions growing for fourteen straight quarters, operating margin expanding for nine straight quarters, and a record of net openings in the second quarter of 2026. That gap between perception and operating reality is the analytical edge; the risk that perception is right lives in the adverse scenario and the disclosed risks, not here.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +11%/year (+68% total): the margin of safety protects the downside. The bull (+27%/year, +228% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Master license under renegotiation. The contractual target of 225 Taco Bell units by the end of 2025 closed at 28, and the licensor could terminate the right to sublicense new stores of that brand and its territorial protections.
• Total geographic concentration. Virtually all revenue originates in China: policy, currency, capital restrictions and the delisting risk under the Holding Foreign Companies Accountable Act weigh on the entire business.
• Licensor decisions. Yum! Brands announced in November 2025 a strategic review of options for Pizza Hut globally, which may not align with the company's plans in China.
• Food safety. Sales were already significantly affected twice in the past decade by adverse publicity about suppliers; Chinese law allows severe penalties against management.
• Network cannibalization. The plan to surpass 30,000 units by 2030 could erode sales at installed units as penetration rises in cities already covered.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 25% above the 10% bar, with a +48% margin → a quality business at a good price.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 7% at a multiple/growth of 1.4 → reasonable for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 9% (EBIT/EV) + ROIC 25% → makes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -8% vs our 7%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor +8%/yr, bull-scenario ceiling +24%/yr over 5y and a +48% margin → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: intangibles, cost advantage, switching costs, efficient scale → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -8%, within what we project (7%) — the story squares with the numbers.