Yum China Holdings Inc (YUMC): The Bull Thesis Worth $100,000

The 10th annual Pershing Square Challenge took place last month, with close to 40 student teams from Columbia Business School’s Applied Security Analysis course taking part in the competition. Each team developed a stock pitch to be presented to billionaire investor Bill Ackman of Pershing Square, the event’s founder, who then chose five pitches that would be presented before a panel of judges during the event’s finale on April 19, which Ackman hosted.

The winning team, which was awarded $100,000 for their victory, was the team of Windsor Cristobal, Anji Lin, and Isabella Lin, who pitched a bull case for Yum China Holdings Inc (NYSE:YUMC). Coming in second and winning $50,000 was the team of Nick Briody, Vy Huynh, and Antonio Lequerica, who pitched J M Smucker Co (NYSE:SJM) as a short idea. We’ll take a look at the winning pitch below.

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Bill Ackman, Carl C. Icahn, William A. Ackman, Pershing Square Capital Management, Icahn Capital LP,

The team started their presentation on Yum China Holdings Inc (NYSE:YUMC) by declaring that they recommend a ‘Buy’ of the stock and have a 2-year price target of $45 on it, which represented 35% upside potential at the time, while their boom case had 61% upside potential.

The team believes that the market is overly focused on the company’s volatile past few years in the country (namely its major food scandals) rather than on the huge growth potential it has there (Yum China has said it could triple units there over the long-term). They also believe Yum China now has the best system in place in the country to prevent any future food scandals.

They also stressed that even when the company was dealing with those food scandals in 2013 and 2014 which led to its comps falling by as much as 20%, it was still able to keep returns above 15% and fund its network growth CapEx entirely from its operating cash flow.

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The team believes that the time to buy Yum China is now, as they see it as being at an inflection point and expect comp growth will begin to come in faster than the market’s estimates. They see the company as being well positioned to expand to under-served cities and develop its online delivery platform to achieve as much as 25% of the company’s revenue mix. They also believe that management’s goals are now better aligned with those of shareholders, with an emphasis on improving operational performance and comps rather than solely on growth through expansion.

Yum China had a strong first-quarter, with restaurant margin jumping to 23% from 19.3% and operating profit gaining 22%. The company opened 133 new restaurants during the period. Shares of Yum China Holdings Inc (NYSE:YUMC) have gained about 7% since the team’s pitch, which you can see in its entirety below.

Ackman’s hedge fund has struggled heavily over the past two years, losing 20.5% in 2015 followed by a 13.5% loss in 2016. Nothing has been working for the fund, as its long and short books have each lost money in each of the last two years. After another rough quarter to kick off 2017, Pershing Square had posted 4% gains net of fees in the second quarter through May 9, pushing its year-to-date gains into positive territory.

Disclosure: None