Yum China Holdings is set to raise at least HK$17.3 billion (US$2.2 billion) in its secondary offering in Hong Kong pricing its new shares at HK$412, the company said on Friday.

The operator of KFC, Pizza Hut and Taco Bell in the mainland previously said it planned to sell 41.9 million shares. The transaction would represent a sharp 4.9 per cent discount to its closing price of US$55.92 in New York on Thursday. 

By comparison, NetEase priced its secondary listing in Hong Kong in June at a tight 2 per cent discount to its closing price in the US, while JD.com’s Hong Kong listing was at a 3.9 per cent discount.

In a statement on Friday, Yum China said it granted the underwriters of its international offering an overallotment option to purchase up to an additional 6.3 million shares at the offer price. If the overallotment is fully exercised, the company would raise HK$19.9 billion.

The offering consists of a sale of about 40.2 million shares to international investors and 1.7 million shares to Hong Kong retail investors.

The deal would be the third-largest fundraising on the Hong Kong bourse this year, after blockbuster secondary listings by JD.com and NetEase as part of a “homecoming” trend among US-listed Chinese companies, according to data from Refinitiv.

It also ranks ahead of China Bohai Bank’s US$1.78 billion initial public offering, the biggest debut on the Hong Kong stock exchange this year.

Yum China, which operates about 10,000 restaurants in 1,400 cities and towns in the mainland, spun off from Yum! Brands four years ago.

Shanghai-based Yum China’s Hong Kong listing came as US stock indices broadly declined on Thursday. Yum China’s US-listed shares fell 3.5 per cent on Thursday.

Yum China’s shares recently traded at 37 times its expected earnings, outpacing McDonald’s and Restaurant Brands International, the owner of Burger King, Popeye’s and Tim Horton’s. Wendy’s Company is one of the few quick-service restaurant operators trading in the US at a higher price-to-earnings ratio of 45.8 times.

The company is hoping that investors in Asia will have a better grasp of consumer trends in its home market as it seeks to diversify its shareholder base. The company’s shares will trade on the Hong Kong stock exchange under the symbol 9987 beginning on September 10.

Yum China said it expects to use the proceeds from the offering to expand its restaurant network and increase its digitalisation efforts, including in its supply chain.

The Hong Kong listing follows a challenging period that saw the company forced to close just over one-third of its restaurants in February as parts of the mainland were locked down in response to the coronavirus pandemic. Yum China reported a first-quarter profit of US$62 million, its worst quarterly result since a net loss of US$107 million in the fourth quarter of 2017.

To navigate slower foot traffic, the company relied on a digital infrastructure it has been building for years – from ordering apps to facial recognition for payments. It also instituted contactless delivery and contactless takeaway procedures to reassure customers.

In the second quarter, 86 per cent of its orders at KFC restaurants were made via the digital channel, including mobile orders and in-store kiosks, the company said.

More than 99 per cent of its stores reopened by the end of June, but the pace of the recovery was uneven as sales softened in June following improvements in April and in May, the company said.

Yum China’s profit in the second quarter fell 26 per cent to US$132 million, but was an improvement over the first quarter. Same-store sales dropped 11 per cent in the second quarter, with double-digit declines at both of its KFC and Pizza Hut locations.

Consumption remained restrained in China this summer, even as other parts of the world’s second-largest economy picked up as lockdowns eased.
China’s industrial production, a measurement of manufacturing and mining output, grew for the fourth-straight month in July, but retail sales contracted by 1.1 per cent, worse than expected, according to the most recent data from the National Bureau of Statistics (NAB). Imports also fell by 1.4 per cent in July.

R.J. Hottovy, a sector strategist at Morningstar, said 2021 is likely to be a “strong recovery year” at Yum China, with low-double-digit growth in same-store sales and restaurant margins returning to the mid-teens despite planned investments in technology and its supply chain.

“Despite uneven results the past several years, we still have conviction in the longer-term unit growth story for Yum China,” Hottovy said in a research report.

At the same time, rising tensions between Washington and Beijing and regulatory changes in Hong Kong have prompted US-listed Chinese firms to consider secondary listings closer to home, as well as take-private deals.

A group of top US regulators recommended in August that Chinese companies and other foreign issuers who fail to provide access to their audit working papers for oversight be delisted from American bourses by January 2022.

The US State Department also asked American colleges and universities to divest their holdings in Chinese companies, warning of the potential for “wholesale delisting”.

Hong Kong has benefited from the uncertain geopolitical environment, attracting a number of high-profile secondary listings from returning Chinese firms, as well as a dual IPO of Ant Group, the operator of Alipay, in the city and Shanghai.

Ant is an affiliate of Alibaba Group Holding, which itself raised US$12.9 billion in a secondary listing in Hong Kong in November. Alibaba is the parent company of the South China Morning Post.

“The fact that US is tightening the rules for Chinese companies to be listed in the US, triggered the massive phenomenon of requests for secondary listings in the Hong Kong market,” Jean-Louis Nakamura, chief investment officer for Asia-Pacific at Swiss private bank Lombard Odier and head of its Hong Kong office.

“It has helped the Hong Kong exchange to see its capitalisation to grow by a size that would not be reached without this kind of rhetoric and escalation of the skirmish between the two countries.”

Goldman Sachs, Citigroup, CMB International and UBS are serving as joint global coordinators on the offering.