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Yum China to Take Over Controlling Stake in Huang Ji Huang

Zacks Equity Research

Yum China Holdings, Inc. YUMC recently announced that it has reached an agreement to acquire a controlling interest in Huang Ji Huang group. However, the value of the deal has been kept under wraps. The deal is likely to be sealed by early 2020, subject to regulatory approval.

Huang Ji Huang, a Chinese-style casual dining franchise business, was found in 2004. Headquartered in Beijing, it has more than 640 restaurants which operate in China and internationally.

The acquisition will help Yum China expand its footprint in the Chinese dining space, where it holds a major share already. The company holds more than 8,700 restaurants in over 1,300 cities, as of June-end. It roughly has five restaurants serving one million people in China, which is expected to grow to 15 stores per million. Moreover, there is ample scope to grow the restaurant base to triple its size, given the continued rise in middle-class discretionary spending.

Additionally, the acquisition is likely to witness synergies from Yum China's scale and system capabilities, Huang Ji Huang's track record of product R&D as well as brand management.

We believe the acquisition will help drive the company’s top line. Moreover, the company’s revenues have grown over the past few quarters. In second-quarter, 2019, the company’s revenues grew 3% year over year. 

The company holds a leadership position in the Chinese restaurant space when it comes to delivery, mobile order and pay, and loyalty membership wherein delivery sales accounted for 20% of sales and Digital payments contributed 90% in the quarter under review. Shares of this Zacks Rank #2 (Buy) company have gained 31.5% year to date, compared with the industry’s 30.6% growth.

Other Key Picks

A few other top-ranked stocks worth considering in the same space are Chuy’s Holdings, Inc. CHUY, Red Robin Gourmet Burgers, Inc. RRGB and Chanticleer Holdings, Inc. BURG. While Chuy’s Holdings and Red Robin Gourmet sport a Zacks Rank #1 (Strong Buy), Chanticleer Holdings carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here

Chuy’s Holdings, Red Robin Gourmet and Chanticleer Holdings have an impressive long-term earnings growth rate of 17.5%, 9.67% and 15%, respectively.

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