JPMorgan Upgrades Yum China Holdings Inc.

Investing.com — JPMorgan upgraded Yum China Holdings Inc. (NYSE: YUMC) to Overweight from Neutral on Wednesday, citing signs that the company’s fundamentals are "bottoming out."

The analysts also raised their price target for the stock to $60 from $35.50, pointing to improved operational efficiency, a 50% increase in the company’s three-year shareholder return plan, and new initiatives in franchisee operations.

"Consumption sentiment in China has been deteriorating since the May Golden Week Holiday," JPMorgan noted, indicating that the weakening consumer environment has pressured industry margins, leading to the exit of smaller competitors and less intense discounting.

They believe this environment has allowed market leaders like Yum China to consolidate their position.

Despite lower average selling prices (ASP) and same-store sales (SSS) declines, JPMorgan explains that Yum China has managed positive traffic growth for seven consecutive quarters, alongside year-over-year margin improvement in the third quarter of 2024.

“This is rare in the retailing industry,” the note highlighted, underscoring the company's cost-saving and efficiency strategies that offset pricing and sales challenges.

JPMorgan raised its 2025-26 earnings per share (EPS) forecasts for Yum China by 7-10%, attributing the increase to “improving margins on efficiency gains and rationalized competition,” as well as a projected 6-7% share buyback in 2025 and 2026, which should bolster EPS.

The bank also pointed to improved cash flow visibility, noting that the raised price target is based on a discounted cash flow (DCF) valuation that considers stronger earnings visibility and lower capital expenditures.

At $60, JPMorgan states the new price target implies a 2025 price-to-earnings (P/E) ratio of 22.7x, aligning with global peers and surpassing local competitors with weaker fundamentals.