Does Yum China Offer Opportunity After Recent Share Price Dip And DCF Valuation Gap?

• If you have ever wondered whether Yum China Holdings is quietly turning into a value play, this is a good moment to take a closer look at the stock.
• Despite being down 4.8% over the last week and 4.3% over the past year, the share price has still managed a 5.6% gain over the last month from a recent close of $46.01. This hints that sentiment may be starting to shift.
• Recent headlines have focused on Yum China expanding its store network across key mainland cities and rolling out more digital ordering and delivery initiatives. These moves can support long term revenue growth. At the same time, investors are weighing macro questions around Chinese consumer demand and regulatory risk, which helps explain the share price volatility.
• On our framework, Yum China scores a strong 6/6 valuation checks, suggesting it screens as undervalued across multiple lenses. Next, we will walk through those methods before finishing with an even more intuitive way to think about what the stock is really worth.

Yum China Holdings delivered -4.3% returns over the last year. See how this stacks up to the rest of the Hospitality industry.

Approach 1: Yum China Holdings Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model estimates what a business is worth today by projecting the cash it can generate in the future and discounting those cash flows back to the present.

For Yum China Holdings, the model starts with last twelve months Free Cash Flow of about $824 million and uses analyst forecasts for the next few years, then extends those trends further out. By 2029, Free Cash Flow is projected to reach roughly $1.39 billion, with additional years extrapolated by Simply Wall St to reflect a moderating growth path as the business matures.

Aggregating and discounting these projected cash flows under a 2 Stage Free Cash Flow to Equity framework gives an estimated intrinsic value of about $66.88 per share. Compared with the recent share price around $46, the DCF implies the stock is trading at roughly a 31.2% discount, which indicates potential upside if the cash flow projections are broadly accurate.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Yum China Holdings is undervalued by 31.2%. Track this in your watchlist or portfolio, or discover 909 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Yum China Holdings.

Approach 2: Yum China Holdings Price vs Earnings

For a consistently profitable business like Yum China, the Price to Earnings ratio is a straightforward way to gauge what investors are willing to pay today for each dollar of current earnings. In general, companies with stronger growth prospects and lower perceived risk can justify a higher PE multiple, while slower growth or higher risk usually deserves a lower one.

Yum China currently trades on a PE of about 18.1x, which is below both the Hospitality industry average of roughly 23.4x and the peer group average of around 24.4x. Simply Wall St also calculates a proprietary Fair Ratio of 21.9x for Yum China. This reflects what its PE should be after factoring in its earnings growth outlook, margins, risk profile, industry and market cap. This Fair Ratio is more tailored than a simple comparison with peers or the wider industry, because it adjusts for company specific strengths and risks rather than assuming all Hospitality stocks deserve the same multiple.

Comparing Yum China’s current 18.1x PE to the 21.9x Fair Ratio suggests the shares are trading below what would be expected based on its fundamentals.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Yum China Holdings Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives, a simple way to connect your view of Yum China’s future to a clear financial forecast and a fair value estimate. A Narrative is your own story behind the numbers, where you spell out what you think will happen to the company’s revenue, earnings and margins, and then see how that translates into a fair value per share. On Simply Wall St’s Community page, used by millions of investors, you can easily create or follow Narratives that link a company’s story, its financial model and a resulting fair value in one place, helping you consider whether the current price makes Yum China a buy, hold or sell. Narratives update dynamically as new information, like earnings or major news, is released, so your fair value stays aligned with reality. For example, some Yum China Narratives on the platform now imply fair values near the lower analyst target of about $53 per share, while more optimistic Narratives point closer to the high end near $76, reflecting how different investors interpret the same data.

Do you think there's more to the story for Yum China Holdings? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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