(Corrects references to Yum making an IPO; the company is spinning off its China unit.)
When you attend presentations for companies about to be listed on the stock market, it's always important to look out for a few things.
The first is the most obvious: Is the conference hall packed with suit-wearing analysts and prospective institutional investors? A nicely attended presentation is a great sign of interest in the company. Next, carefully watch the array of execs presenting the company's financials and future prospects. These are the folks that will be leading the company at least for a year after the it goes public, and it's good to come away feeling confident that they know what they are doing (and mostly importantly, they realize that driving value quickly is rather important).
So there I was on Tuesday at the Yum Brands (YUM) presentation for its China business, which will be spun off via an offering on the NYSE on Nov. 1. Every seat in the room was taken. Most everyone stayed for the entire five hours of presentations. The crowd appeared engaged in the story. As is to be expected, execs did their best sales job. And yours truly pumped out eight stories from the event and talked with the Yum CFO in the afternoon. All fun stuff, indeed.
In the end, here is the overall takeaway. Will Yum China be this year's hottest stock on its debut day? No, as the business is well known, it operates in a hyper-competitive market and has had two years of mixed performance. But will the company likely see some decent buying interest on day one of trading and in the months following? It's highly likely, given the achievable growth estimates the company put forward on Tuesday, the strength of its business model and still-favorable growth dynamics for China's fast food space (population growth, rising wealth, technology adoption, and so on). Yum China could be a nice longer-term addition to a portfolio for someone seeking exposure to China via a company that can be easily understood.
Here are a couple key things I observed from the meeting:
Management Team
Yum China has one of the most experienced management teams I have ever seen. There are people on the team that helped launch the brands such as KFC and Pizza Hut in China. That is pretty telling.
They fully understand Chinese consumers and how they are evolving, and they are moving quickly to address these changes with a fully stocked product-development pipeline and tech initiatives. If Yum China stumbles in its first year as a stand-alone company, it likely won't be because of stumbling execs, but rather as a result of the unpredictable Chinese market.
Performance Out of the Gate
It's important for any newly traded company to deliver solid financials as soon as possible. A company can't trade on hope forever -- take a look at Twitter's post IPO stock crash. Yum China will likely go on to post a respectable year -- and importantly, a nicely profitable year. For 2016, Yum China is expected to haul in $8 billion in sales, up from the $4.7 billion generated so far this year. Operating profit is pegged at $1.1 billion for the year, an increase from $751 million for the year to-date, ended Sep. 3, 2016. The business's total restaurant count is seen ending the year at 7,500, an increase from about 7,000 currently.
Ins and Outs
Several other favorable factors also stood out. Over time, Yum China expects to have more than 20,000 restaurants in operation -- a number that is achievable, seeing as Taco Bell hasn't even landed in China yet (the brand will see its first opening in Shanghai in December), and the fact the company has developed a new smaller store format that could quickly be scaled for urban markets. Meanwhile, the China business will have zero debt on the books at the time it becomes a public company, freeing it up to aggressively roll out the new stores that it guided Wall Street to -- and potentially acquire upstart chains. It could also lead to them paying out dividends or buying back stock -- and frankly raises the potential of the business being acquired by some Chinese-based company.
