Yum China: A New Spin-Off

05/02/2017 2:50 am EST

Focus: GLOBAL

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Yum China (YUMC) is a new stock (though not a new company) that checks most of the boxes we look at when evaluating potential winners, suggests Paul Goodwin, global stock expert and editor of Cabot Emerging Markets Investor.

Big company that’s a leader in its field? Check. History of solid growth? Check. Long runway of growth going forward? Check. And a stock that recently lifted into an uptrend? Yes!

Yum China is the Chinese arm of Yum! Brands, the global quick service restaurant giant. It was spun off from its parent company last October, but it’s been operating in China for a long time—the company recently celebrated the 30th anniversary of its first store in that country.

Today Yum China is far and away the leading western quick service restaurant operator in China. At the end of March, the company had 7,663 restaurants (KFC, Pizza Huts, Taco Bell and a couple of newer, home-grown brands) that attract a combined two billion customer visits annually.

Long-term, given China’s booming urban population and the relative under-penetration of quick-service restaurants in cities, Yum China sees the potential to triple its restaurant count.
The stock certainly portends good things down the road. YUMC had a good first month after being spun off, but then began a very tight multi-month base — notice how shares spent many weeks in the $25.5 to $27 range during December/January, and, after a brief blip higher, again in February/March.

Such action is usually a sign of accumulation, as big investors pick up shares in a certain price zone. And now the stock is freewheeling, after having surged to new highs following its earnings report and following through to the upside in recent days.

The chart looks great, but given the market’s recent wobbles, YUMC’s recent run-up and our relatively small cash position, we’re going to play it a bit conservatively here — we’ll take a half-sized position now and look to average up if things go well in the weeks ahead.

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