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Capital Markets

Yum China to raise $2.2bn in Hong Kong secondary listing

Introduction

Fast-food company Yum China, which operates Pizza Hut, KFC, and Taco Bell in China, has become the latest New York-listed Chinese company to pursue a secondary share sale in Hong Kong amidst rising tensions between Washington and Beijing, which have reached their worst state in decades. Pricing its shares at HK$412, the company is set to raise $2.22bn from the listing, making it the third-largest fundraising on the Hong Kong Stock Exchange this year and further contributes to the region’s thriving equity capital markets where year-to-date listings are worth almost double that of the same period last year.

Yum China Holdings Inc

Founded: 2016 (spun off from its predecessor, Yum! Brands)

Sector: Consumer discretionary – restaurants 

CEO: Joey Wat

HQ: Shanghai, China

Type: Public

Revenue (2019):  $8.78bn

Operating profit (2019): $901m

Public listing overview

On September 4th, Yum China announced it would offer 41.91 million shares in its secondary listing in Hong Kong, pricing each share at HK$412. This represents a sharp 4.9% discount from the closing price of its New York-listed shares, which closed at $55.92 on September 3rd. The secondary listing, which consists of a sale of roughly 40.2 million shares to international investors and 1.7 million shares to Hong Kong retail investors, is set to raise $2.22bn, making it the third-largest listing in Hong Kong this year behind JD.com and NetEase who managed to raise $4.4bn and $3.1bn respectively in their listings in June. The company began trading on September 10th but had a disappointing Hong Kong debut, with share prices falling to an intraday low of HK$386.20, down 6.3%, and eventually closing 5.3% down in its first day of trading due to investor concerns of the company’s limited potential for growth. This makes it the weakest Hong Kong debut in over a year. Goldman Sachs Group was appointed as the sole sponsor of the deal, with UBS Group, Citigroup, and CMB International Capital all acting as joint global coordinators of the listing.

Yum China, which operates 10,000 restaurants in over 1,400 cities across the country, was forced to close over a third of its restaurants in February due to the coronavirus pandemic. The company’s Q1 profit of $62m represented its worst quarterly result since Q4 2017, however, there were signs of recovery as Q2 profit rose to $132m despite remaining 26% below the same period last year. Although more than 99% of its restaurants were reopened by the end of June, the company’s financials are still expected to remain under pressure for the latter part of the year in the current COVID environment which sees restaurants struggle to maintain social distancing regulations.

Public listing rationale

Yum China, the biggest restaurant operator in the country, is looking to raise funds on the Hong Kong Stock Exchange as relations between the US and China worsen and are under significant strain. The White House and the US Senate, both of whom are requesting Chinese companies to provide full access to its audits to US regulators, are threatening to delist Chinese companies from the New York Stock Exchange and Nasdaq by January 2022 unless this condition is met. Yum China’s announcement to pursue a secondary listing away from Wall Street makes it the latest to join a growing list of US-listed Chinese companies looking to secure finance in Hong Kong in anticipation of increased geopolitical risk.

The $2.22bn raised from the deal would be spent on expanding the company’s restaurant network and further developing the digital infrastructure which it has been building on in recent years. Yum China’s existing digital infrastructure, which ranges from contactless delivery to facial recognition for payment, demonstrated its importance amidst the heavily reduced foot traffic of the pandemic. In its KFC restaurants, 86% of orders in Q2 this year were made using the digital channel, either through mobile orders or in-store kiosks and has played a crucial role in helping to initiate the company’s difficult path to recovery, where sales rose in April and May but weakened again in June. Despite the help of its digital infrastructure, sales in Q2 were down 11% compared to the same period last year, with both its Pizza Hut and KFC chains recording double-digit declines. The proceeds of the listing would give scope to further develop the company’s digital infrastructure, speeding up its recovery.

Hong Kong Stock Exchange continues to prosper

Tensions between Washington and Beijing have benefitted the Hong Kong Stock Exchange, attracting several high-profile listings. Equity capital market activity in Hong Kong, including both IPOs and secondary listings, was worth $20.34bn year-to-date ahead of Yum China’s announcement, almost double the $10.83bn figure for the same period last year, according to data from Refinitiv. China Renaissance Securities estimates that a further 32 New York-listed Chinese companies, with a total market capitalisation of almost $200bn, could be eligible for secondary listings in the Asian financial hub, including delivery chain ZTO Express and search giant Baidu, which could further contribute to the ongoing trend this year. In addition to secondary listings, Hong Kong is set to receive a big boost from the IPO of Jack Ma’s Ant Group, which has forgone New York due to the current geopolitical environment and decided to pursue a dual listing in Shanghai and Hong Kong instead, in what is likely to be a record-breaking $30bn public debut.

The booming stock market in Hong Kong has seen JD.com and NetEase, the two largest secondary listings there this year, benefit from a significant rise in share prices of 32% and 15% respectively. However, Andy Maynard, a trader at China Renaissance Securities, stated that despite strong demand for shares in Hong Kong this month, Yum China’s secondary listing may not be met with the same excitement due to limited opportunities for the company to expand its market share and significant pandemic-induced pressure on its restaurant network. This is reflected in its poor Hong Kong debut this past week.

Sources

https://www.ft.com/content/5e0b5ce7-f2dc-4bcc-853a-bd61a745d0ee

https://www.reuters.com/article/us-yumchina-hongkong-listing/yum-china-to-raise-2-2-billion-in-hong-kong-secondary-listing-sources-idUSKBN25V06T

https://www.bloomberg.com/news/articles/2020-09-03/yum-china-said-to-guide-hong-kong-listing-price-at-hk-412-each

https://www.scmp.com/business/banking-finance/article/3100204/kfc-operator-yum-china-expected-raise-us22-billion

https://www.cnbc.com/2020/09/04/yum-china-hong-kong-secondary-listing.html

https://asia.nikkei.com/Business/Markets/KFC-operator-Yum-China-heats-up-Hong-Kong-secondary-listing

https://www.scmp.com/business/companies/article/3100949/yum-china-flops-hong-kong-debut-amid-lingering-questions-about

https://www.ft.com/content/dd28ff22-9585-4e86-8ee5-52e47e3d3861

https://ir.yumchina.com/static-files/f69aa412-a552-4ba7-a582-3f88be3b223f

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