According to a research report, the firm has raised its fair value estimate for Yum China Holdings, Inc. (ASX: YUMC) shares, which possess a wide economic moat, by 1% to $77 per share. It assigns a fair value of HKD 600 to the Hong Kong-listed shares. The current US share price is around $45, indicating the stock remains significantly undervalued, trading at a forward price-to-earnings ratio of 13 times 2027 forecasts. Management has committed to returning 100% of free cash flow to shareholders.

Yum China has entered into a definitive agreement with Yum! Brands to acquire full ownership of the Pizza Hut brand in China for a cash consideration of $1.2 billion. Upon completion of the transaction, Yum China will no longer be required to pay any franchise fees to Yum! Brands. The deal is expected to close in the third quarter of 2026.

The report views the $1.2 billion purchase price as attractive relative to the fundamental economics and growth potential of Pizza Hut China. From the perspective of franchise fee savings alone, the transaction is value-accretive, with the added strategic flexibility offering further upside potential. The $1.2 billion paid by Yum China represents approximately 20 times the estimated 2025 franchise fee savings, which is below the firm's fair value estimate based on a 25 times P/E multiple.

The report highlights that strategic flexibility represents a greater long-term benefit. Full ownership will enable Yum China to implement menu innovations, new store formats, and IP collaborations more swiftly, allowing it to better align with consumer trends and drive sales growth.