http://fasb.org/us-gaap/2022#OperatingLeaseRightOfUseAssethttp://fasb.org/us-gaap/2022#PropertyPlantAndEquipmentNethttp://fasb.org/us-gaap/2022#AccountsPayableAndAccruedLiabilitiesCurrenthttp://fasb.org/us-gaap/2022#AccountsPayableAndAccruedLiabilitiesCurrent--12-31http://fasb.org/us-gaap/2022#PropertyPlantAndEquipmentNethttp://www.yumchina.com/20221231#ClosureAndImpairmentIncomeExpensesNetFYP3Yhttp://fasb.org/us-gaap/2022#AccountsPayableAndAccruedLiabilitiesCurrenttwo yearshttp://www.yumchina.com/20221231#ClosureAndImpairmentIncomeExpensesNetP3Yhttp://fasb.org/us-gaap/2022#AccountsPayableAndAccruedLiabilitiesCurrenthttp://www.yumchina.com/20221231#ClosureAndImpairmentIncomeExpensesNetfalsehttp://fasb.org/us-gaap/2022#OperatingLeaseRightOfUseAsset0001673358P3Y00016733582016-10-310001673358us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-12-310001673358srt:MinimumMemberyumc:PartnerPSUAwardsMemberyumc:EmployeesMember2020-02-012020-02-290001673358us-gaap:CorporateNonSegmentMemberyumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMember2021-01-012021-12-310001673358yumc:OtherRevenueMemberyumc:OperatingSegmentsAndCorporateNonSegmentMember2021-01-012021-12-310001673358us-gaap:RestrictedStockUnitsRSUMember2022-01-012022-12-310001673358us-gaap:FixedIncomeSecuritiesMemberus-gaap:FairValueMeasurementsRecurringMember2021-12-310001673358yumc:CombinedEliminationsMemberus-gaap:IntersegmentEliminationMember2020-01-012020-12-310001673358us-gaap:AdditionalPaidInCapitalMember2022-12-310001673358us-gaap:RetainedEarningsMember2021-01-012021-12-310001673358yumc:KFCMemberyumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMember2020-01-012020-12-310001673358us-gaap:AdditionalPaidInCapitalMember2022-01-012022-12-310001673358yumc:KFCMember2020-12-310001673358yumc:FinanceLeasesPrimarilyBuildingsMember2022-12-310001673358yumc:RestaurantsMemberus-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsNonrecurringMember2020-01-012020-12-310001673358us-gaap:OperatingSegmentsMember2021-01-012021-12-310001673358us-gaap:AllOtherSegmentsMemberyumc:RevenueFromExternalCustomersMember2021-01-012021-12-310001673358yumc:PizzaHutMemberyumc:FoodAndNonFoodRevenuesFromSalesMember2022-01-012022-12-310001673358yumc:BeijingMemberyumc:KFCMemberyumc:OwnerAndOperatorOfKFCMember2022-12-310001673358yumc:PizzaHutMemberyumc:OtherRevenueMember2022-01-012022-12-310001673358yumc:HangzhouCateringMember2021-12-3100016733582015-02-012015-02-280001673358us-gaap:RetainedEarningsMember2020-12-310001673358us-gaap:FairValueInputsLevel2Memberus-gaap:FixedIncomeSecuritiesMemberus-gaap:FairValueMeasurementsRecurringMember2021-12-310001673358us-gaap:FiniteLivedIntangibleAssetsMemberyumc:FujianSunnerDevelopmentCoLtdMember2022-12-310001673358yumc:ModificationOrOtherReassessmentEventsMember2020-01-012020-12-310001673358us-gaap:CorporateNonSegmentMemberyumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMember2022-01-012022-12-310001673358yumc:NonCashTransactionsMember2020-01-012020-12-310001673358yumc:PizzaHutMember2021-12-310001673358yumc:COVID19Member2022-01-012022-12-310001673358us-gaap:OperatingSegmentsMemberyumc:KFCMember2020-01-012020-12-310001673358yumc:PizzaHutMember2022-12-310001673358us-gaap:BankTimeDepositsMemberus-gaap:FairValueMeasurementsRecurringMember2022-12-310001673358yumc:WarrantsFirstTrancheMemberyumc:PrimaveraCapitalGroupMember2016-11-010001673358us-gaap:BuildingMembersrt:MinimumMember2022-01-012022-12-310001673358us-gaap:FairValueInputsLevel1Memberus-gaap:FixedIncomeSecuritiesMemberus-gaap:FairValueMeasurementsRecurringMember2021-12-310001673358yumc:RedeemableNoncontrollingInterestMember2020-01-012020-12-310001673358yumc:RestaurantsMemberus-gaap:FairValueMeasurementsNonrecurringMember2020-12-310001673358us-gaap:StockAppreciationRightsSARSMember2022-01-012022-12-310001673358yumc:COVID19Member2021-01-012021-12-310001673358yumc:ReacquiredFranchiseRightsMembersrt:MaximumMember2022-01-012022-12-310001673358yumc:OtherRevenueMemberyumc:OperatingSegmentsAndCorporateNonSegmentMember2022-01-012022-12-310001673358yumc:SuzhouKFCMember2020-07-012020-09-300001673358yumc:OtherRevenueMember2022-01-012022-12-310001673358us-gaap:OperatingSegmentsMemberus-gaap:AllOtherSegmentsMember2021-01-012021-12-310001673358us-gaap:TreasuryStockMember2020-12-310001673358us-gaap:NoncontrollingInterestMember2021-01-012021-12-310001673358yumc:OffshoreCreditFacilityMember2022-12-310001673358yumc:HangzhouCateringMemberyumc:UnconsolidatedAffiliatesMember2022-12-310001673358yumc:NonEmployeeDirectorsMember2021-01-012021-12-310001673358yumc:PizzaHutMember2022-01-012022-12-3100016733582020-12-310001673358yumc:RevenueFromExternalCustomersMemberyumc:CorporateAndUnallocatedMember2021-01-012021-12-310001673358yumc:OthersFiniteLivedIntangibleAssetsMember2021-12-310001673358us-gaap:FairValueInputsLevel2Memberyumc:StructuredDepositsMemberus-gaap:FairValueMeasurementsRecurringMember2022-12-310001673358yumc:ModificationOrOtherReassessmentEventsMember2021-01-012021-12-310001673358yumc:OtherRevenueMemberyumc:KFCMember2020-01-012020-12-310001673358yumc:PrimaveraCapitalGroupMemberyumc:WarrantsSecondTrancheMember2016-11-010001673358yumc:ReacquiredFranchiseRightsMemberyumc:SuzhouKFCMember2020-01-012020-12-310001673358yumc:NonEmployeeDirectorsMember2022-01-012022-12-310001673358us-gaap:AccountsPayableAndAccruedLiabilitiesMemberyumc:FujianSunnerDevelopmentCoLtdMember2021-12-310001673358yumc:CustomerRelatedAssetsMember2022-12-310001673358yumc:GlobalOfferingMember2020-09-102020-09-100001673358yumc:RevenueFromExternalCustomersMemberyumc:OperatingSegmentsAndCorporateNonSegmentMember2021-01-012021-12-310001673358yumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMemberyumc:OperatingSegmentsAndCorporateNonSegmentMember2022-01-012022-12-310001673358yumc:PizzaHutMemberyumc:OtherRevenueMember2021-01-012021-12-310001673358yumc:JointVentureMember2020-04-300001673358yumc:GovernmentSubsidiesMemberyumc:CompanyRestaurantExpensesMember2022-01-012022-12-3100016733582017-10-032017-10-040001673358yumc:PartnerPSUAwardsMember2021-01-012021-12-310001673358yumc:GovernmentSubsidiesMember2022-01-012022-12-310001673358us-gaap:FairValueMeasurementsNonrecurringMemberyumc:RestaurantsMember2021-12-310001673358us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2022-12-310001673358srt:MinimumMemberus-gaap:MachineryAndEquipmentMember2022-01-012022-12-310001673358yumc:OthersMember2021-12-310001673358yumc:KFCMemberyumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMember2022-01-012022-12-310001673358yumc:PizzaHutMemberyumc:FranchiseFeesAndIncomeMember2020-01-012020-12-310001673358us-gaap:RetainedEarningsMember2022-12-310001673358us-gaap:PerformanceSharesMember2022-12-310001673358us-gaap:FairValueInputsLevel2Memberus-gaap:BankTimeDepositsMemberus-gaap:FairValueMeasurementsRecurringMember2022-12-310001673358yumc:PartnerPSUAwardsMember2020-01-012020-12-310001673358yumc:ReacquiredFranchiseRightsMemberyumc:WuxiKFCMember2022-01-012022-12-310001673358yumc:CombinedEliminationsMemberyumc:OperatingSegmentsAndCorporateNonSegmentMember2021-01-012021-12-310001673358yumc:PizzaHutMemberyumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMember2021-01-012021-12-310001673358yumc:FujianSunnerDevelopmentCoLtdMember2021-01-012021-12-310001673358us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2021-12-310001673358us-gaap:MoneyMarketFundsMemberus-gaap:FairValueMeasurementsRecurringMember2021-12-310001673358yumc:FinanceLeasesPrimarilyBuildingsMember2021-12-310001673358srt:ScenarioForecastMember2023-12-310001673358yumc:OtherRevenueMember2021-01-012021-12-310001673358yumc:FranchiseFeesAndIncomeMember2021-01-012021-12-310001673358dei:OtherAddressMember2022-01-012022-12-310001673358yumc:FranchiseFeesAndIncomeMember2022-01-012022-12-310001673358us-gaap:AllOtherSegmentsMember2021-01-012021-12-310001673358us-gaap:AdditionalPaidInCapitalMember2020-12-310001673358yumc:KFCMemberyumc:FoodAndNonFoodRevenuesFromSalesMember2020-01-012020-12-310001673358yumc:NonCashTransactionsMember2021-01-012021-12-310001673358yumc:PartnerPSUAwardsMemberyumc:EmployeesMember2020-02-012020-02-290001673358yumc:IncludingNoncontrollingInterestMember2021-01-012021-12-310001673358us-gaap:CommonStockMember2022-01-012022-12-310001673358yumc:MeituanDianpingMember2020-04-012020-06-300001673358us-gaap:OperatingSegmentsMemberus-gaap:AllOtherSegmentsMember2022-12-310001673358yumc:UpfrontFranchiseFeesMember2021-12-310001673358us-gaap:TreasuryStockMember2020-01-012020-12-310001673358yumc:GovernmentSponsoredPlanMember2022-01-012022-12-310001673358yumc:NonEmployeeDirectorsMember2020-01-012020-12-310001673358yumc:HuangJiHuangGroupMember2020-04-080001673358yumc:OtherRevenueMemberyumc:OperatingSegmentsAndCorporateNonSegmentMember2020-01-012020-12-310001673358us-gaap:AdditionalPaidInCapitalMemberyumc:SuzhouKFCMember2022-01-012022-12-310001673358us-gaap:PerformanceSharesMember2020-01-012020-12-310001673358yumc:SocialSecurityBureauMembersrt:MinimumMember2022-01-012022-12-310001673358us-gaap:OperatingSegmentsMember2022-01-012022-12-310001673358us-gaap:AllOtherSegmentsMemberyumc:FranchiseFeesAndIncomeMember2021-01-012021-12-310001673358yumc:ReacquiredFranchiseRightsMemberyumc:HangzhouKFCMember2021-01-012021-12-310001673358us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2022-12-310001673358yumc:UpfrontFranchiseFeesMember2022-12-310001673358yumc:FranchiseFeesAndIncomeMemberus-gaap:TransferredOverTimeMember2020-01-012020-12-310001673358us-gaap:RestrictedStockUnitsRSUMemberus-gaap:ShareBasedCompensationAwardTrancheThreeMember2022-01-012022-12-310001673358yumc:KFCMember2021-01-012021-12-310001673358us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-12-310001673358yumc:CompanyRestaurantExpensesMemberyumc:GovernmentSubsidiesMember2021-01-012021-12-310001673358srt:MaximumMember2022-01-012022-12-310001673358us-gaap:AdditionalPaidInCapitalMember2021-12-310001673358yumc:ModificationOrOtherReassessmentEventsMember2022-01-012022-12-310001673358yumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMember2021-01-012021-12-310001673358us-gaap:CommonStockMember2019-12-310001673358yumc:WarrantsFirstTrancheMemberyumc:PrimaveraAndAntFinancialGroupsMember2016-11-010001673358yumc:StockOptionsAndStockAppreciationRightsMember2021-01-012021-12-310001673358us-gaap:TreasuryStockMember2021-01-012021-12-310001673358us-gaap:OperatingSegmentsMemberyumc:KFCMember2022-12-310001673358yumc:LongTermTimeDepositsMemberus-gaap:FairValueMeasurementsRecurringMember2021-12-310001673358us-gaap:StockAppreciationRightsSARSMember2022-12-310001673358yumc:PizzaHutMembersrt:MinimumMember2022-12-310001673358yumc:PizzaHutMemberyumc:FoodAndNonFoodRevenuesFromSalesMember2021-01-012021-12-310001673358us-gaap:AllOtherSegmentsMemberyumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMember2021-01-012021-12-310001673358yumc:HuangJiHuangGroupMember2022-12-310001673358yumc:IncludingNoncontrollingInterestMember2020-01-012020-12-310001673358yumc:CompanyRestaurantExpensesMember2022-01-012022-12-310001673358us-gaap:StockAppreciationRightsSARSMember2020-01-012020-12-310001673358yumc:OperatingSegmentsAndCorporateNonSegmentMember2022-01-012022-12-310001673358yumc:MeituanDianpingMember2020-06-300001673358yumc:HuangJiHuangMembersrt:MaximumMember2022-01-012022-12-310001673358yumc:KFCMember2020-01-012020-12-310001673358yumc:CorporateAndUnallocatedMemberus-gaap:IntersegmentEliminationMember2022-01-012022-12-310001673358yumc:CustomerLoyaltyProgramsMember2022-12-310001673358yumc:TheStockExchangeOfHongKongLimitedMember2022-01-012022-12-310001673358yumc:GovernmentSubsidiesMemberyumc:CompanyRestaurantExpensesMember2020-01-012020-12-310001673358yumc:RevenueFromExternalCustomersMemberyumc:CorporateAndUnallocatedMember2022-01-012022-12-310001673358yumc:BuildingsAndImprovementsAndConstructionInProgressMember2022-12-310001673358yumc:KfcAndPizzaHutMember2022-01-012022-12-310001673358us-gaap:AdditionalPaidInCapitalMember2021-01-012021-12-310001673358us-gaap:AllOtherSegmentsMember2021-12-310001673358yumc:HangzhouKfc1Member2021-12-310001673358yumc:LavazzaGroupMember2021-07-012021-09-300001673358yumc:PizzaHutMemberyumc:RevenueFromExternalCustomersMember2021-01-012021-12-310001673358yumc:CustomerLoyaltyProgramsMember2021-12-310001673358us-gaap:OperatingSegmentsMemberyumc:KFCMember2021-12-310001673358yumc:DaojiaPlatformMember2020-01-012020-12-310001673358yumc:PartnerPSUAwardsMember2022-01-012022-12-310001673358yumc:HangzhouCateringMember2022-01-012022-12-310001673358yumc:FranchiseFeesAndIncomeMemberus-gaap:TransferredAtPointInTimeMember2021-01-012021-12-310001673358us-gaap:AllOtherSegmentsMemberyumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMember2020-01-012020-12-3100016733582020-01-012020-12-310001673358yumc:RedeemableNoncontrollingInterestMember2020-12-310001673358yumc:PizzaHutMemberyumc:FoodAndNonFoodRevenuesFromSalesMember2020-01-012020-12-310001673358yumc:ReacquiredFranchiseRightsMemberyumc:HangzhouKFCMember2022-01-012022-12-310001673358yumc:CorporateAndUnallocatedMember2021-01-012021-12-310001673358yumc:InvestmentInEquitySecuritiesMemberus-gaap:FairValueMeasurementsRecurringMember2022-12-310001673358us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2021-12-310001673358us-gaap:NoncontrollingInterestMember2022-01-012022-12-310001673358yumc:PizzaHutMemberyumc:FranchiseFeesAndIncomeMember2021-01-012021-12-310001673358us-gaap:IntersegmentEliminationMember2020-01-012020-12-310001673358yumc:PizzaHutMemberyumc:RevenueFromExternalCustomersMember2022-01-012022-12-310001673358us-gaap:OperatingSegmentsMemberus-gaap:AllOtherSegmentsMember2020-01-012020-12-310001673358us-gaap:RetainedEarningsMember2019-12-310001673358yumc:TrancheTwoWarrantsMember2017-01-090001673358yumc:VariableReturnInvestmentsMemberus-gaap:FairValueMeasurementsRecurringMember2021-12-310001673358us-gaap:PerformanceSharesMember2022-01-012022-12-310001673358yumc:HangzhouCateringMember2022-12-310001673358yumc:ReacquiredFranchiseRightsMemberyumc:WuxiKFCMember2022-12-310001673358yumc:OtherRevenueMemberus-gaap:IntersegmentEliminationMember2020-01-012020-12-310001673358us-gaap:RestrictedStockUnitsRSUMember2021-12-310001673358yumc:PizzaHutMember2021-01-012021-12-310001673358us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2022-12-310001673358us-gaap:StockAppreciationRightsSARSMember2021-01-012021-12-310001673358yumc:PrepaidStoredValueProductsMember2022-12-310001673358yumc:RevenueFromExternalCustomersMemberyumc:KFCMember2021-01-012021-12-310001673358yumc:StockOptionsAndStockAppreciationRightsMember2020-01-012020-12-310001673358us-gaap:AllOtherSegmentsMember2022-12-310001673358us-gaap:AllOtherSegmentsMemberyumc:OtherRevenueMember2022-01-012022-12-310001673358yumc:ReacquiredFranchiseRightsMember2021-12-310001673358us-gaap:RetainedEarningsMember2021-12-310001673358us-gaap:CommonStockMember2022-12-310001673358us-gaap:MachineryAndEquipmentMember2022-12-310001673358srt:MinimumMemberyumc:KFCMember2022-12-310001673358us-gaap:TreasuryStockMember2019-12-310001673358us-gaap:IntersegmentEliminationMember2021-01-012021-12-310001673358us-gaap:CommonStockMember2020-01-012020-12-310001673358yumc:FranchiseFeesAndIncomeMemberus-gaap:TransferredOverTimeMember2022-01-012022-12-310001673358us-gaap:FairValueInputsLevel2Memberus-gaap:FixedIncomeSecuritiesMemberus-gaap:FairValueMeasurementsRecurringMember2022-12-310001673358yumc:LittleSheepGroupLimitedMember2021-12-310001673358yumc:HuangJiHuangGroupMember2022-01-012022-12-310001673358us-gaap:OperatingSegmentsMemberyumc:PizzaHutMemberyumc:RevenueFromExternalCustomersMember2020-01-012020-12-310001673358yumc:FujianSunnerDevelopmentCoLtdMember2022-01-012022-12-310001673358yumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMemberyumc:OperatingSegmentsAndCorporateNonSegmentMember2021-01-012021-12-310001673358yumc:HuangJiHuangGroupMember2020-04-082020-04-080001673358us-gaap:AllOtherSegmentsMemberyumc:FranchiseFeesAndIncomeMember2020-01-012020-12-310001673358yumc:AntFinancialServicesGroupMember2016-10-302016-11-010001673358us-gaap:OperatingSegmentsMemberyumc:PizzaHutMember2022-01-012022-12-310001673358yumc:NonCashTransactionsMember2022-01-012022-12-310001673358yumc:InvestmentInEquitySecuritiesMemberus-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2022-12-310001673358us-gaap:RevolvingCreditFacilityMember2022-01-012022-12-310001673358yumc:GovernmentSponsoredPlanMember2021-01-012021-12-310001673358us-gaap:OperatingSegmentsMemberus-gaap:AllOtherSegmentsMember2022-01-012022-12-310001673358us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-12-310001673358yumc:IncludingNoncontrollingInterestMember2021-12-310001673358yumc:PizzaHutMemberyumc:FranchiseFeesAndIncomeMember2022-01-012022-12-310001673358yumc:InvestmentInEquitySecuritiesMemberus-gaap:FairValueMeasurementsRecurringMember2021-12-310001673358us-gaap:NoncontrollingInterestMember2022-12-310001673358us-gaap:CommonStockMember2020-12-310001673358yumc:DaojiaPlatformMember2021-12-310001673358yumc:RevenueFromExternalCustomersMemberyumc:OperatingSegmentsAndCorporateNonSegmentMember2022-01-012022-12-310001673358us-gaap:NoncontrollingInterestMember2021-12-310001673358yumc:SuzhouKFCMember2022-12-310001673358us-gaap:CorporateNonSegmentMember2022-01-012022-12-3100016733582022-01-012022-12-310001673358us-gaap:CorporateNonSegmentMember2020-01-012020-12-310001673358yumc:RevenueFromExternalCustomersMember2021-01-012021-12-310001673358yumc:FoodAndNonFoodRevenuesFromSalesMemberyumc:OperatingSegmentsAndCorporateNonSegmentMember2021-01-012021-12-310001673358us-gaap:CommonStockMember2021-12-310001673358us-gaap:RestrictedStockUnitsRSUMember2021-01-012021-12-310001673358yumc:KFCMember2022-12-3100016733582016-10-302016-11-010001673358us-gaap:OperatingSegmentsMemberus-gaap:AllOtherSegmentsMember2021-12-310001673358yumc:LavazzaGroupMember2021-07-012021-09-300001673358us-gaap:OperatingSegmentsMemberyumc:PizzaHutMember2021-12-310001673358us-gaap:AllOtherSegmentsMember2020-12-310001673358yumc:FoodAndNonFoodRevenuesFromSalesMember2021-01-012021-12-310001673358yumc:KFCMemberyumc:FranchiseFeesAndIncomeMember2022-01-012022-12-310001673358yumc:FranchiseFeesAndIncomeMemberus-gaap:TransferredAtPointInTimeMember2022-01-012022-12-310001673358us-gaap:CorporateNonSegmentMemberyumc:RevenueFromExternalCustomersMember2020-01-012020-12-310001673358yumc:RedeemableNoncontrollingInterestMember2022-01-012022-12-310001673358yumc:PrimaveraCapitalGroupMember2016-10-302016-11-010001673358yumc:RestaurantsMemberus-gaap:FairValueMeasurementsNonrecurringMember2022-12-310001673358yumc:FranchiseFeesAndIncomeMemberyumc:OperatingSegmentsAndCorporateNonSegmentMember2022-01-012022-12-310001673358yumc:KFCMember2022-01-012022-12-310001673358us-gaap:AllOtherSegmentsMemberyumc:FranchiseFeesAndIncomeMember2022-01-012022-12-310001673358yumc:ReacquiredFranchiseRightsMemberyumc:SuzhouKFCMember2020-12-310001673358yumc:FujianSunnerDevelopmentCoLtdMember2021-03-3100016733582017-01-082017-01-090001673358us-gaap:CorporateNonSegmentMember2022-12-310001673358us-gaap:FairValueInputsLevel1Memberyumc:VariableReturnInvestmentsMemberus-gaap:FairValueMeasurementsRecurringMember2021-12-310001673358yumc:SuzhouKFCMember2022-01-012022-12-310001673358yumc:HangzhouKFCMember2021-10-012021-12-310001673358yumc:FoodAndNonFoodRevenuesFromSalesMember2022-01-012022-12-310001673358us-gaap:OperatingSegmentsMemberyumc:RevenueFromExternalCustomersMember2020-01-012020-12-310001673358us-gaap:BankTimeDepositsMemberus-gaap:FairValueMeasurementsRecurringMember2021-12-310001673358us-gaap:RevolvingCreditFacilityMembersrt:MaximumMember2022-01-012022-12-310001673358yumc:OnshoreCreditFacilityMember2022-12-310001673358yumc:LittleSheepGroupLimitedMember2022-12-310001673358us-gaap:AllOtherSegmentsMemberyumc:FoodAndNonFoodRevenuesFromSalesMember2021-01-012021-12-310001673358us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-01-012021-12-310001673358yumc:HangzhouCateringMemberyumc:HangzhouKFCMember2021-12-310001673358us-gaap:OperatingSegmentsMemberyumc:PizzaHutMember2022-12-310001673358us-gaap:RestrictedStockUnitsRSUMember2020-01-012020-12-310001673358yumc:HangzhouKFCMember2021-12-310001673358us-gaap:AllOtherSegmentsMemberyumc:OtherRevenueMember2021-01-012021-12-310001673358us-gaap:AdditionalPaidInCapitalMember2020-01-012020-12-310001673358us-gaap:OperatingSegmentsMemberyumc:PizzaHutMember2020-01-012020-12-310001673358yumc:OtherRevenueMemberus-gaap:IntersegmentEliminationMember2021-01-012021-12-310001673358yumc:StockOptionsAndStockAppreciationRightsMember2022-01-012022-12-310001673358us-gaap:CorporateNonSegmentMemberyumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMember2020-01-012020-12-310001673358us-gaap:FairValueInputsLevel2Memberyumc:LongTermTimeDepositsMemberus-gaap:FairValueMeasurementsRecurringMember2022-12-310001673358yumc:AnnualPSUAwardsMember2022-01-012022-12-310001673358yumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMemberyumc:OperatingSegmentsAndCorporateNonSegmentMember2020-01-012020-12-310001673358yumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMember2022-01-012022-12-310001673358yumc:TwoThousandAndSixteenAndTwoThousandAndTwentyTwoLongTermIncentivePlanMembersrt:MinimumMember2022-01-012022-12-310001673358us-gaap:FairValueInputsLevel2Memberyumc:LongTermTimeDepositsMemberus-gaap:FairValueMeasurementsRecurringMember2021-12-310001673358us-gaap:PerformanceSharesMember2021-12-310001673358yumc:KFCMemberyumc:FoodAndNonFoodRevenuesFromSalesMember2021-01-012021-12-310001673358yumc:LavazzaJointVentureMember2021-09-300001673358yumc:FujianSunnerDevelopmentCoLtdMember2022-12-310001673358us-gaap:IntersegmentEliminationMember2022-01-012022-12-310001673358srt:MinimumMemberus-gaap:SoftwareAndSoftwareDevelopmentCostsMember2022-01-012022-12-310001673358yumc:OtherRevenueMemberyumc:KFCMember2021-01-012021-12-310001673358srt:MaximumMemberus-gaap:MachineryAndEquipmentMember2022-01-012022-12-3100016733582019-12-310001673358us-gaap:SubsequentEventMember2023-02-070001673358us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-12-310001673358yumc:OtherRevenueMemberyumc:KFCMember2022-01-012022-12-310001673358us-gaap:OperatingSegmentsMemberyumc:RevenueFromExternalCustomersMemberyumc:KFCMember2020-01-012020-12-310001673358yumc:MeituanDianpingMember2021-01-012021-12-310001673358us-gaap:MoneyMarketFundsMemberus-gaap:FairValueMeasurementsRecurringMember2022-12-310001673358us-gaap:CorporateNonSegmentMember2021-12-310001673358yumc:PrivilegeMembershipProgramsMember2021-12-310001673358us-gaap:NoncontrollingInterestMember2020-12-310001673358yumc:ReacquiredFranchiseRightsMember2022-12-310001673358yumc:HuangJiHuangGroupMemberus-gaap:TrademarksMember2022-12-310001673358us-gaap:AllOtherSegmentsMemberyumc:OtherRevenueMember2020-01-012020-12-310001673358yumc:HangzhouKFCMember2021-10-012021-12-310001673358us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001673358srt:MinimumMemberyumc:CustomerRelatedAssetsMember2022-01-012022-12-310001673358yumc:FranchiseFeesAndIncomeMemberyumc:OperatingSegmentsAndCorporateNonSegmentMember2021-01-012021-12-310001673358srt:MaximumMemberus-gaap:RestrictedStockUnitsRSUMember2022-01-012022-12-310001673358us-gaap:OperatingSegmentsMemberyumc:KFCMember2021-01-012021-12-310001673358us-gaap:AllOtherSegmentsMemberyumc:FoodAndNonFoodRevenuesFromSalesMember2022-01-012022-12-310001673358us-gaap:FixedIncomeSecuritiesMemberus-gaap:FairValueMeasurementsRecurringMember2022-12-310001673358yumc:FranchiseFeesAndIncomeMemberus-gaap:TransferredOverTimeMember2021-01-012021-12-3100016733582022-06-300001673358yumc:HuangJiHuangMembersrt:MinimumMember2022-01-012022-12-310001673358srt:MaximumMemberyumc:PartnerPSUAwardsMemberyumc:EmployeesMember2020-02-012020-02-290001673358yumc:StructuredDepositsMemberus-gaap:FairValueMeasurementsRecurringMember2022-12-310001673358yumc:LittleSheepMember2022-01-012022-12-310001673358us-gaap:MachineryAndEquipmentMember2021-12-310001673358yumc:ReacquiredFranchiseRightsMemberyumc:SuzhouKFCMember2022-12-310001673358us-gaap:OperatingSegmentsMember2020-01-012020-12-310001673358us-gaap:OtherLiabilitiesMember2022-12-310001673358yumc:DaojiaPlatformMember2022-12-310001673358us-gaap:AllOtherSegmentsMemberus-gaap:IntersegmentEliminationMember2021-01-012021-12-310001673358yumc:IncludingNoncontrollingInterestMember2022-01-012022-12-310001673358yumc:PrepaidStoredValueProductsMember2021-12-310001673358yumc:RestaurantsMemberus-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsNonrecurringMember2022-01-012022-12-310001673358us-gaap:CorporateNonSegmentMemberyumc:OtherRevenueMember2022-01-012022-12-310001673358us-gaap:FairValueMeasurementsRecurringMember2021-12-310001673358yumc:GovernmentSubsidiesMember2021-01-012021-12-310001673358yumc:ReacquiredFranchiseRightsMemberyumc:HangzhouKFCMember2021-12-310001673358us-gaap:OperatingSegmentsMemberyumc:KFCMember2022-01-012022-12-310001673358yumc:OtherRevenueMemberus-gaap:IntersegmentEliminationMember2022-01-012022-12-310001673358yumc:TwoThousandAndTwentyTwoLongTermIncentivePlanMemberus-gaap:CommonStockMember2022-10-240001673358us-gaap:AllOtherSegmentsMemberyumc:FoodAndNonFoodRevenuesFromSalesMember2020-01-012020-12-310001673358yumc:MeituanDianpingMember2018-09-300001673358yumc:MeituanDianpingMember2020-01-012020-12-310001673358us-gaap:AllOtherSegmentsMemberus-gaap:IntersegmentEliminationMember2022-01-012022-12-310001673358yumc:LittleSheepGroupLimitedAndDaojiaMember2022-12-310001673358yumc:FranchiseFeesAndIncomeMemberus-gaap:TransferredAtPointInTimeMember2020-01-012020-12-310001673358yumc:RestaurantsMemberus-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsNonrecurringMember2021-01-012021-12-310001673358yumc:WarrantsSecondTrancheMemberyumc:PrimaveraAndAntFinancialGroupsMember2016-11-010001673358us-gaap:AllOtherSegmentsMemberyumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMember2022-01-012022-12-310001673358yumc:ChineseLocalTaxAuthorityMember2022-01-012022-12-310001673358yumc:StockOptionsAndStockAppreciationRightsMember2021-12-310001673358yumc:KFCMemberyumc:FranchiseFeesAndIncomeMember2021-01-012021-12-310001673358yumc:SecondaryListingMember2020-09-012020-09-300001673358yumc:KFCMemberyumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMember2021-01-012021-12-310001673358yumc:RevenueFromExternalCustomersMember2022-01-012022-12-310001673358us-gaap:FairValueInputsLevel1Memberus-gaap:FixedIncomeSecuritiesMemberus-gaap:FairValueMeasurementsRecurringMember2022-12-3100016733582022-08-012022-08-310001673358yumc:BuildingsAndImprovementsAndConstructionInProgressMember2021-12-310001673358us-gaap:OperatingSegmentsMemberus-gaap:AllOtherSegmentsMemberyumc:RevenueFromExternalCustomersMember2020-01-012020-12-310001673358us-gaap:CorporateNonSegmentMemberyumc:OtherRevenueMember2021-01-012021-12-310001673358us-gaap:TrademarksMemberyumc:HuangJiHuangGroupMember2021-12-310001673358us-gaap:NoncontrollingInterestMember2019-12-310001673358yumc:CompanyRestaurantExpensesMember2021-01-012021-12-310001673358yumc:COVID19Member2020-01-012020-12-310001673358yumc:KFCMemberyumc:WuxiMemberyumc:OwnerAndOperatorOfKFCMember2022-12-310001673358yumc:FranchiseFeesAndIncomeMember2020-01-012020-12-310001673358us-gaap:AllOtherSegmentsMemberus-gaap:IntersegmentEliminationMember2020-01-012020-12-310001673358yumc:StockOptionsAndStockAppreciationRightsMember2022-12-310001673358yumc:OperatingSegmentsAndCorporateNonSegmentMember2020-01-012020-12-3100016733582021-12-310001673358yumc:FranchiseFeesAndIncomeMemberyumc:OperatingSegmentsAndCorporateNonSegmentMember2020-01-012020-12-310001673358yumc:GovernmentSponsoredPlanMember2020-01-012020-12-310001673358country:CN2022-01-012022-12-310001673358yumc:OtherRevenueMember2020-01-012020-12-310001673358us-gaap:AllOtherSegmentsMember2020-01-012020-12-310001673358us-gaap:SubsequentEventMember2023-02-072023-02-070001673358yumc:RevenueFromExternalCustomersMember2020-01-012020-12-310001673358yumc:RevenueFromExternalCustomersMemberyumc:KFCMember2022-01-012022-12-310001673358yumc:DaojiaPlatformMember2020-04-012020-06-300001673358us-gaap:BuildingMembersrt:MaximumMember2022-01-012022-12-310001673358us-gaap:NoncontrollingInterestMember2020-01-012020-12-310001673358yumc:TacoBellMember2022-01-012022-12-310001673358srt:MaximumMemberyumc:CustomerRelatedAssetsMember2022-01-012022-12-310001673358yumc:ReacquiredFranchiseRightsMembersrt:MinimumMember2022-01-012022-12-310001673358yumc:PizzaHutMember2020-12-310001673358us-gaap:CorporateNonSegmentMember2021-01-012021-12-310001673358yumc:WarrantsFirstTrancheMemberyumc:AntFinancialServicesGroupMember2016-11-010001673358yumc:KFCMember2021-12-310001673358yumc:RedeemableNoncontrollingInterestMember2021-12-310001673358us-gaap:RestrictedStockUnitsRSUMember2022-12-310001673358us-gaap:FairValueMeasurementsRecurringMember2022-12-310001673358yumc:FujianSunnerDevelopmentCoLtdMember2021-01-012021-03-310001673358us-gaap:PerformanceSharesMember2021-01-012021-12-310001673358yumc:CombinedEliminationsMemberyumc:OperatingSegmentsAndCorporateNonSegmentMember2022-01-012022-12-310001673358yumc:LongTermIncentivePlanMember2016-10-310001673358yumc:PizzaHutMemberyumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMember2022-01-012022-12-310001673358yumc:RedeemableNoncontrollingInterestMember2022-12-310001673358yumc:JointVentureMemberyumc:LavazzaGroupMember2020-04-300001673358yumc:FoodAndNonFoodRevenuesFromSalesMember2020-01-012020-12-310001673358yumc:WarrantsSecondTrancheMemberyumc:AntFinancialServicesGroupMember2016-11-010001673358yumc:CustomerRelatedAssetsMember2021-12-310001673358yumc:KFCMemberyumc:ShanghaiMemberyumc:OwnerAndOperatorOfKFCMember2022-12-310001673358yumc:SuzhouKFCMember2020-09-300001673358yumc:MeituanDianpingMember2022-01-012022-12-310001673358us-gaap:FairValueInputsLevel2Memberus-gaap:BankTimeDepositsMemberus-gaap:FairValueMeasurementsRecurringMember2021-12-310001673358yumc:OthersFiniteLivedIntangibleAssetsMember2022-12-310001673358srt:MinimumMemberus-gaap:LeaseholdImprovementsMember2022-01-012022-12-310001673358yumc:FoodAndNonFoodRevenuesFromSalesMemberyumc:OperatingSegmentsAndCorporateNonSegmentMember2020-01-012020-12-310001673358yumc:LongTermTimeDepositsMemberus-gaap:FairValueMeasurementsRecurringMember2022-12-310001673358yumc:LavazzaGroupMember2021-07-012021-09-300001673358yumc:PaymentProcessorsAndAggregatorsMember2021-12-310001673358srt:MaximumMemberus-gaap:SoftwareAndSoftwareDevelopmentCostsMember2022-01-012022-12-310001673358us-gaap:TrademarksMemberyumc:LittleSheepMember2021-12-3100016733582021-01-012021-12-310001673358yumc:HangzhouCateringMember2021-10-012021-12-310001673358yumc:InvestmentInEquitySecuritiesMemberus-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2021-12-310001673358us-gaap:RetainedEarningsMember2020-01-012020-12-310001673358yumc:FoodAndNonFoodRevenuesFromSalesMemberyumc:OperatingSegmentsAndCorporateNonSegmentMember2022-01-012022-12-310001673358us-gaap:RetainedEarningsMember2022-01-012022-12-310001673358us-gaap:TreasuryStockMember2022-01-012022-12-310001673358yumc:PizzaHutMemberyumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMember2020-01-012020-12-310001673358us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2021-12-3100016733582023-02-220001673358us-gaap:TreasuryStockMember2021-12-310001673358yumc:PaymentProcessorsAndAggregatorsMember2022-12-310001673358us-gaap:AllOtherSegmentsMemberyumc:RevenueFromExternalCustomersMember2022-01-012022-12-310001673358us-gaap:OperatingSegmentsMemberyumc:PizzaHutMember2021-01-012021-12-3100016733582022-12-310001673358yumc:OperatingSegmentsAndCorporateNonSegmentMember2021-01-012021-12-310001673358us-gaap:AccountsPayableAndAccruedLiabilitiesMemberyumc:FujianSunnerDevelopmentCoLtdMember2022-12-310001673358yumc:DaojiaPlatformMember2022-01-012022-12-310001673358srt:MaximumMemberus-gaap:LeaseholdImprovementsMember2022-01-012022-12-310001673358us-gaap:AdditionalPaidInCapitalMember2019-12-310001673358us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-01-012022-12-310001673358yumc:CompanyRestaurantExpensesMember2020-01-012020-12-310001673358yumc:ReacquiredFranchiseRightsMemberyumc:HangzhouKFCMember2022-12-310001673358yumc:ReacquiredFranchiseRightsMemberyumc:SuzhouKFCMember2022-01-012022-12-310001673358yumc:FranchiseFeesAndIncomeMemberyumc:KFCMember2020-01-012020-12-310001673358srt:MaximumMemberyumc:OthersFiniteLivedIntangibleAssetsMember2022-01-012022-12-310001673358us-gaap:TrademarksMemberyumc:LittleSheepMember2022-12-310001673358srt:MinimumMemberus-gaap:RestrictedStockUnitsRSUMember2022-01-012022-12-310001673358yumc:TransactionsWithFranchiseesAndUnconsolidatedAffiliatesMember2020-01-012020-12-310001673358srt:MaximumMemberyumc:TwoThousandAndSixteenAndTwoThousandAndTwentyTwoLongTermIncentivePlanMember2022-01-012022-12-310001673358yumc:LittleSheepGroupLimitedAndDaojiaMember2022-01-012022-12-310001673358yumc:GovernmentSubsidiesMember2020-01-012020-12-310001673358yumc:TwoThousandAndTwentyTwoLongTermIncentivePlanMember2022-10-242022-10-240001673358us-gaap:CommonStockMember2021-01-012021-12-310001673358yumc:TrancheOneWarrantsMember2017-01-090001673358yumc:SocialSecurityBureauMembersrt:MaximumMember2022-01-012022-12-310001673358srt:MinimumMember2022-01-012022-12-310001673358yumc:RedeemableNoncontrollingInterestMember2021-01-012021-12-310001673358yumc:KFCMemberyumc:FoodAndNonFoodRevenuesFromSalesMember2022-01-012022-12-310001673358us-gaap:CorporateNonSegmentMemberyumc:OtherRevenueMember2020-01-012020-12-310001673358yumc:HuangJiHuangGroupMember2021-12-310001673358yumc:PrivilegeMembershipProgramsMember2022-12-31iso4217:USDxbrli:sharesxbrli:pureyumc:Segmentyumc:Tranchexbrli:sharesiso4217:CNYyumc:Restaurantyumc:TradingDaysiso4217:USD

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

 

 

EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2022

 

 

 

OR

 

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

 

 

EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission file number 001-37762

 

Yum China Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

81-2421743

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

101 East Park Boulevard, Suite 805

Plano, Texas 75074

United States Of America

 

Yum China Building

20 Tian Yao Qiao Road

Shanghai 200030

People’s Republic Of China

 

(Address, including Zip Code, of Principal Executive Offices)

 

Registrant’s telephone number, including area code: (469) 980-2898

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, Par Value $0.01 Per Share

YUMC

New York Stock Exchange

9987

The Stock Exchange of Hong Kong Limited

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer: ☑

Accelerated filer: ☐

Non-accelerated filer: ☐

Smaller reporting company:

 

Emerging growth company:

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No ☑

 

The aggregate market value of the voting stock (which consists solely of shares of common stock) held by non-affiliates of the registrant as of June 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $20.3 billion. Solely for purposes of this disclosure, shares of common stock held by executive officers and directors of the registrant as of such date have been excluded because such persons may be deemed to be affiliates. The number of shares of the registrant’s common stock outstanding as of February 22, 2023 was 418,400,738 shares.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive proxy statement for the registrant’s 2023 annual meeting of stockholders (the “2023 Proxy Statement”), to be filed not later than 120 days after the end of the registrant’s fiscal year, are incorporated by reference into Part III of this Form 10-K.

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I

 

 

Item 1.

Business

2

 

Information about our Executive Officers

20

Item 1A.

Risk Factors

23

Item 1B.

Unresolved Staff Comments

60

Item 2.

Properties

60

Item 3.

Legal Proceedings

60

Item 4.

Mine Safety Disclosures

60

 

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

61

Item 6.

[RESERVED]

62

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

63

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

84

Item 8.

Financial Statements and Supplementary Data

85

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

130

Item 9A.

Controls and Procedures

130

Item 9B.

Other Information

130

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

130

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

131

Item 11.

Executive Compensation

131

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

131

Item 13.

Certain Relationships and Related Transactions, and Director Independence

131

Item 14.

Principal Accountant Fees and Services

131

 

 

 

PART IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

132

Item 16.

Form 10-K Summary

136

Signatures

 

137

 

 


 

Forward-Looking Statements

 

This annual report on Form 10-K (this “Form 10-K”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend all forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

 

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. These statements often include words such as “may,” “will,” “estimate,” “intend,” “seek,” “expect,” “project,” “anticipate,” “believe,” “plan,” “could,” “target,” “predict,” “likely,” “should,” “forecast,” “outlook,” “model,” “continue,” “ongoing” or other similar terminology. Forward-looking statements are based on our current expectations, estimates, assumptions or projections concerning future results or events, including, without limitation, statements regarding our strategies to expand our restaurant network and restaurant portfolio, our strategies to improve store performance and develop new sources of revenue, plans to invest in technology and high-quality assets, plans to enhance digital and delivery capabilities, franchise development, logistics and supply chain management, our sustainability goals, anticipated effects of population and macroeconomic trends and the expected impact of the COVID-19 pandemic. Forward-looking statements are neither predictions nor guarantees of future events, circumstances or performance and are inherently subject to known and unknown risks, uncertainties and assumptions that could cause our actual results and events to differ materially from those indicated by those forward-looking statements. We cannot assure you that any of our expectations, estimates, assumptions or projections will be achieved. Factors that could cause actual results and events to differ materially from our expectations, estimates, assumptions or projections include (i) the risks and uncertainties described in the Risk Factors included in Part I, Item 1A of this Form 10-K and (ii) the factors described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this Form 10-K. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. We disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances, except as required by law.

 

1

 

2022 Form 10-K


 

PART I

 

Item 1. Business.

 

References to “Yum China” mean Yum China Holdings, Inc. and references to the “Company,” “we,” “us,” and “our” mean Yum China and its subsidiaries.

 

“U.S. dollars,” “$” or “US$” refers to the legal currency of the United States, and “RMB” or “Renminbi” refers to the legal currency of the People’s Republic of China (the “PRC” or “China”).

 

The KFC, Pizza Hut, Taco Bell, Lavazza, Little Sheep and Huang Ji Huang brands are collectively referred to as the “brands” or “concepts.” Throughout this Form 10-K, the terms “brands” and “concepts” are used interchangeably and “restaurants,” “stores” and “units” are used interchangeably.

 

General

 

Yum China is the largest restaurant company in China in terms of 2022 system sales. We had $9.6 billion of revenues in 2022 and nearly 13,000 restaurants as of December 31, 2022. Our growing restaurant network consists of our flagship KFC and Pizza Hut brands, as well as emerging brands such as Taco Bell, Lavazza, Little Sheep and Huang Ji Huang.

 

We have the exclusive right to operate and sublicense the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands in China, excluding Hong Kong, Macau and Taiwan. We own the intellectual property of the Little Sheep and Huang Ji Huang concepts outright. KFC was the first major global restaurant brand to enter China in 1987. With more than 35 years of operations, we have developed extensive operating experience in the China market. We have since grown to become the largest restaurant company in China in terms of 2022 system sales, with nearly 13,000 restaurants covering over 1,800 cities primarily in China as of December 31, 2022. We believe that there are significant opportunities to expand within China, and we intend to focus our efforts on increasing our geographic footprint in both existing and new cities.

 

As of December 31, 2022, we owned and operated approximately 86% of our restaurants. Franchisees contribute to our revenue through the payment of upfront franchise fees and on-going royalties based on a percentage of sales, and payments for other transactions with us, such as purchases of food and paper products, advertising services, delivery services and other services.

 

Restaurant Concepts

 

KFC

 

KFC is the leading and the largest quick-service restaurant (“QSR”) brand in China in terms of 2022 system sales. Founded in Corbin, Kentucky by Colonel Harland D. Sanders in 1939, KFC opened its first restaurant in Beijing, China in 1987. As of December 31, 2022, there were over 9,000 KFC restaurants in more than 1,800 cities across China. In addition to Original Recipe® chicken and other chicken products, KFC in China has an extensive menu featuring beef burgers, pork, seafood, rice dishes, congees, fresh vegetables, desserts, coffee, tea and many other products. KFC also seeks to increase revenue from different channels, including dine-in, delivery, takeaway and packaged foods such as steak, fried rice and pasta. KFC primarily competes with western QSR brands in China, such as McDonald’s, Dicos and Burger King, among which we believe KFC had an approximate two-to-one lead over its nearest competitor in terms of store count as of the end of 2022.

 

Pizza Hut

 

Pizza Hut is the leading and the largest casual dining restaurant (“CDR”) brand in China in terms of 2022 system sales and number of restaurants as of December 31, 2022, offering multiple dayparts, including breakfast, lunch, afternoon tea and dinner. Since opening its first China restaurant unit in Beijing in 1990, Pizza Hut has grown rapidly and, as of year-end 2022, there were over 2,900 Pizza Hut restaurants in over 650 cities across China. Pizza Hut has an extensive menu offering a broad variety of pizzas, steaks, pasta, rice dishes and other entrees, appetizers, beverages and desserts. Pizza Hut also aims to further drive growth from different channels and occasions, including dine-in, delivery, takeaway and packaged foods such as steak and pasta. Measured by number of restaurants, we believe Pizza Hut has an approximate five-to-one lead over its nearest western CDR competitor in China as of the end of 2022.

 

2

 

2022 Form 10-K


 

Other Concepts

 

In addition to KFC and Pizza Hut, our restaurant brand portfolio also includes Taco Bell, Lavazza, Little Sheep and Huang Ji Huang.

 

Taco Bell. Taco Bell is the world’s leading western QSR brand specializing in Mexican-style food, including tacos, burritos, quesadillas, salads, nachos and similar items. We opened our first Taco Bell restaurant in Shanghai, China, in December 2016. As of December 31, 2022, there were over 90 Taco Bell units in China.

 

Lavazza. In April 2020, we partnered with Luigi Lavazza S.p.A. (“Lavazza Group”), the world-renowned family-owned Italian coffee company, and established a joint venture (“Lavazza joint venture”), to explore and develop the Lavazza coffee concept in China. In September 2021, the Company and Lavazza Group entered into agreements to accelerate the expansion of Lavazza coffee shops, which offer a premium and authentic Italian coffee experience in China. As of December 31, 2022, there were 85 Lavazza units in China.

 

Little Sheep. Little Sheep, with its roots in Inner Mongolia, China, specializes in “Hot Pot” cooking, which is very popular in China, particularly during the winter months. Little Sheep had over 180 units in both China and international markets as of December 31, 2022. Of these, 175 units were franchise restaurants.

 

Huang Ji Huang. In April 2020, we completed the acquisition of a controlling interest in Huang Ji Huang. Founded in 2004, Huang Ji Huang had over 590 units in China and internationally as of December 31, 2022. Huang Ji Huang primarily operates a franchise model and is an industry-leading simmer pot brand.

 

Our Strategies

 

Our primary strategy is to grow sales and profits across our portfolio of brands through organic growth, growth of franchise restaurants and development of new restaurant concepts, along with growing our online business. We are accelerating our store network expansion to reach our next milestone of 20,000 stores. We will drive growth from our core brands, as well as emerging brands such as Taco Bell and Lavazza. We will continue to invest in digitalization and supply chain, our key growth enablers.

 

Continue to strategically expand our restaurant network

 

We are confident in the long-term market opportunities in China. We believe we have the potential to grow to 20,000 restaurants or more in the future and we are currently tracking over 900 cities that do not have a KFC or Pizza Hut restaurant.

 

Further expand geographical coverage. Restaurant chains have a low penetration rate in China, especially in lower-tier cities. Given the rapidly expanding middle class and dining out population as a result of continued economic growth and urbanization, we believe there are significant opportunities to expand within China, and we intend to focus our efforts on increasing our geographic footprint in both existing and new cities. For additional information on the risks associated with this growth strategy, see the section entitled “Item 1A. Risk Factors,” including the risk factor entitled “We may not attain our target development goals; aggressive development could cannibalize existing sales; and new restaurants may not be profitable.”

 

Explore new restaurant formats. We are keen to explore various new restaurant formats to support further store expansion, including different store designs or service models aimed at addressing the needs of different guests and for different occasions. We believe that our first-mover advantage and in-depth local know-how will help us to build robust development pipelines to seize the market opportunities.

 

Capture franchise opportunity. While we continue to focus on the operation of our Company-owned restaurant units, we will also continue to seek franchise opportunities for both our core and emerging brands. As of December 31, 2022, approximately 14% of our restaurants were operated by franchisees. We anticipate high franchisee demand for our brands, supported by strong unit economics, operational consistency and multiple store formats to drive restaurant growth. While the franchise market in China is still in an early stage compared to developed markets, we plan to continue to develop our franchisee-owned store portfolio over time by focusing on select channels and lower-tier city development, among others.

 

Grow emerging brands. Our key growth strategy for emerging brands, such as Taco Bell, Lavazza, Little Sheep and Huang Ji Huang, focuses on exploring suitable business models to achieve sustainable growth. In addition, we plan to continue our efforts in product innovation and operational enhancement for these emerging brands to potentially scale up operations in the future.

 

3

 

2022 Form 10-K


 

Continue to improve unit-level performance and develop new sources of revenue

 

Food innovation and value proposition. We will continue to focus on food innovation and strengthen our value proposition. We are keenly aware of the strength of our core menu items. At the same time, we seek to continue to introduce innovative items to meet evolving consumer preferences and local tastes, drive guest engagement and continue to broaden our brand appeal. Each of our restaurant concepts has proprietary menu items, and emphasizes the preparation of food with high quality ingredients. We will continue to develop unique recipes, regionally-inspired menu items and special seasonings to provide appealing, tasty and convenient food choices at competitive prices. In addition, KFC plans to continue providing value with product offerings such as the bucket and increased combo options throughout the day and Pizza Hut plans to continue its multiple value campaigns. We will continue to promote signature value campaigns such as “Crazy Thursday” and “Buy More Save More on Sunday” for KFC and “Scream Wednesday” for Pizza Hut, which offer selected menu items at attractive prices, and have received positive consumer feedback. We believe our continued food innovation and value proposition are pivotal to enhancing our unit-level performance by driving order frequency and order ticket size.

 

Daypart opportunities. We believe there are significant daypart opportunities across our brands. For example, KFC has expanded its daypart offerings, including late night street food and afternoon tea, and Pizza Hut continued to drive sales from breakfast and business lunch.

 

Best in-store experience. We continuously look for ways to improve the guest experience. For example, we plan to continue to invest in refurbishing our restaurants. Our brands also look to improve efficiency to drive sales growth. For instance, we have simplified menus and fine-tuned our in-store self-service order devices. We are also expanding our delivery business through our proprietary smartphone applications and pre-order services. In addition, we are continuously investing in digital and automation to improve operating transparency and efficiency. For example, our smart order system enhances the customer experience by reducing wait times and providing real-time order status, and we also added robotic servers at one-third of our Pizza Hut restaurants, freeing up crews to serve customers. To further enhance the guest experience, we are also evaluating the possibility of adopting other digital initiatives in our restaurants and will continue to invest in this area, as discussed more fully below.

 

Continue to invest in technology, with a focus to capture digital, delivery and off-premise consumption opportunities

 

We will continue to invest in technology to further empower and maintain our competitive advantages. We will focus on improving our overall technology infrastructure and digital and delivery capabilities. We believe these efforts will further support our sustainable growth, improve our operational efficiency and ensure quality. Our digital and delivery strategies are set forth below.

 

Digital. As of December 31, 2022, our loyalty programs had over 380 million members and over 130 million members for KFC and Pizza Hut, respectively. The programs have been effective in increasing order frequency and enhancing guest loyalty. Digital orders exceeded $8 billion and accounted for approximately 89% of KFC and Pizza Hut Company sales in 2022. Going forward, we will continue to leverage our powerful digital ecosystem to drive sales, improve the guest experience and increase operational efficiency. We plan to increase our investment in end-to-end digitalization, automation and artificial intelligence (“AI”), to more effectively connect online traffic with our offline assets. To improve our operational efficiency, we will focus on connecting our front-end, guest facing systems to back-end systems such as operations and supply chain.

 

Delivery. China is a world leader in the emerging online to offline, or O2O, market. This is where digital online ordering technologies interact with traditional brick and mortar retail to enhance the customer experience. We see considerable growth potential in the delivery market by aligning our proven restaurant operation capabilities with our delivery network that offers consumers the ability to order restaurant food anywhere. Delivery contributed approximately 39% of Company sales in 2022. Going forward, we will continue to optimize our delivery service by adopting innovative technologies, rolling out new delivery menu items and developing novel delivery service concepts, such as our dynamically adjusting delivery coverage for each store by daypart, taking into account the operating hours of nearby stores.

 

New retail. As part of our strategy to drive growth from off-premise occasions, our new retail products are designed to capture at-home consumption demand by leveraging our online and offline sales channels. We launched packaged foods such as steak, fried rice and pasta, so customers can enjoy these products any time they want. In 2022, we further broadened our offerings, adding some of our restaurant classics, such as our Egg Tart and Popcorn Chicken. We also developed our own retail brand, Shaofaner, which sells packaged foods through online and offline channels. We intend to continue to capture the opportunity with our capabilities in product innovation, supply chain and online and offline assets.

 

4

 

2022 Form 10-K


 

Strategically optimize our restaurant portfolio

 

We aim to maintain our industry-leading position in the QSR and CDR markets in China with our core brands, and gain a stronger foothold and enhanced know-how in the Chinese cuisine space, which represents a significant share of the restaurant industry in China. In April 2020, we completed the acquisition of a controlling interest in Huang Ji Huang, a leading Chinese CDR franchise business. Following the acquisition of Huang Ji Huang, we established a Chinese dining business unit to manage our Chinese restaurant brands.

 

We are also building a coffee portfolio to capture today’s underserved coffee market in China across different customer segments, including coffee products provided by KFC (“K-Coffee”), which offers convenience and value. In April 2020, we also partnered with Lavazza to explore and develop the Lavazza coffee concept in China to offer a premium and authentic Italian coffee experience in China. As of December 31, 2022, there were 85 Lavazza units in China, and we target to open 1,000 Lavazza stores in the next few years.

 

Prudently pursue investments in high-quality assets

 

Our investment strategy primarily focuses on three areas, restaurant brands with excellent growth potential and synergy, joint ventures and the enablers that empower our brands (e.g. ecosystem, technology). We continue to identify and evaluate investment opportunities in high-quality brands to capture growth opportunities. Also, we look for potential opportunities to invest in digitalization and supply chain, our key growth enablers, to further enhance our competitiveness. We will prudently assess investment targets based on each candidate’s strategic value, brand equity, business scale and financial performance, among other factors.

 

Operational Management

 

Restaurant Unit Management

 

Our restaurant management structure varies among our restaurant brands and restaurant size. Generally, each restaurant that we operate is overseen by a management team led by a restaurant general manager, or RGM, together with one or more assistant managers. RGMs are skilled and highly trained, with most having a college-level education. The performance of RGMs is regularly monitored and coached by senior operations leaders. Each restaurant brand issues detailed manuals, which may then be customized to meet local regulations and customs. These manuals set forth standards and requirements for all aspects of restaurant operations. The restaurant management team is responsible for the day-to-day operation of our restaurants and for ensuring compliance with operating standards. Each RGM is also responsible for handling guest complaints and emergency situations.

 

Franchise Restaurant Management

 

As of December 31, 2022, approximately 14% of our restaurants were franchise restaurants. Our franchise program is designed to promote consistency and quality, and we are selective in granting franchises. Franchisees supply capital initially by paying a franchise fee to us and by purchasing or leasing the land use rights, building, equipment, signs, seating, inventories and supplies; and, over the longer term, by reinvesting in the business through expansion. Franchisees contribute to our revenue through the payment of upfront franchise fees and on-going royalties based on a percentage of sales, and payments for other transactions with us, such as purchases of food and paper products, advertising services, delivery services and other services.

 

Our franchise agreements set out specific operational standards, which are consistent with standards required for Company-owned restaurants. Like our Company-owned restaurants, our franchise restaurants are also subject to our internal quality audits and reviews. There are no notable operational differences between Company-owned restaurants and franchise restaurants.

 

We believe that it is important to maintain strong and open relationships with our franchisees and their representatives. To this end, the Company invests a significant amount of time working with the franchisees and their representative organizations on key aspects of the business, including products, equipment, operational improvements and standards and management techniques.

 

Expansion Management

 

We believe that there are significant opportunities to expand within China and we intend to focus our efforts on increasing our geographic footprint in both existing and new cities. We expanded our restaurant count from 7,562 at the end of 2016 to 12,947 at the end of 2022, representing a compound annual growth rate (CAGR) of approximately 9%. We expect to expand our business through organic growth, growth of franchise units and development of our emerging brands.

 

5

 

2022 Form 10-K


 

Our expansion strategy has been systematically focused on high potential locations across city tiers, including entering new commercial areas within existing cities and new cities. Each potential restaurant site is assessed and evaluated individually based on its site potential, potential financial return and potential impact to nearby stores. We take into account factors such as economic and demographic conditions and prospects, consumption patterns, GDP per capita and population density of the local community, presence of activity centers such as shopping complexes, schools and residential areas that generate guest traffic, and the presence of other restaurants in the vicinity during our site selection process. We also consider the guest traffic and distance from the existing restaurants under the same brand to reduce sales transfer that may occur from existing restaurant units. As we are opening more smaller format stores and actively managing costs, the average capital spending for each new KFC and Pizza Hut restaurant unit in 2022 was approximately RMB1.3 to 2 million.

 

Supply Chain Management

 

The Company’s restaurants, including those operated by franchisees, are large purchasers of a number of food and paper products, equipment and other restaurant supplies. The principal items purchased include protein ingredients (including poultry, pork, beef and seafood), cheese, oil, flour, vegetables and paper and packaging materials. The Company has not experienced any significant, continuous shortages of supplies, and alternative sources for most of these products are generally available. Prices paid for supplies fluctuate from time to time. We control our raw material costs by entering into long-term bulk purchase agreements for our key food ingredients, fully utilizing all chicken parts, increasing local sourcing and developing long-term relationships with suppliers.

 

The Company partners with over 800 independent suppliers, which are mostly China-based. We implement a strict supplier qualification process that includes supplier compliance checks and on-site audits to ensure the supplier meets our food safety and quality control standards. We have formulated detailed specifications for food ingredients and consumables we procure. We believe supply chain management is crucial to the sustainability of our business and we are dedicated to applying digitalization and automation technologies in our supply chain management system. Our in-house and integrated supply chain management system employs more than 1,400 staff in food safety, quality assurance, procurement management, logistics, engineering and supply chain system.

 

In addition, we operate a tailor-made, world-class logistics management system, which is capable of accommodating large scale, wide coverage and advanced information dissemination as well as fast store expansions. To further strengthen our supply chain network, the Company acquired land in 2022 and 2021 to build eight new logistics centers. The Company, along with multiple independently owned and operated distributors, utilizes 33 logistics centers to distribute supplies to Company-owned and franchised stores, as well as to third-party customers. In addition, the Company owns seasoning facilities for its Chinese dining business unit, which manufacture and sell seasoning products to Huang Ji Huang and Little Sheep franchisees. The Company’s supply chain strategy of working with multiple suppliers, as well as building a vast logistics network, allows for continuous supply of products in the event that supply from an individual supplier or logistics center becomes unfeasible.

 

To improve the efficiency and effectiveness of our procurement process, the Company has adopted a central procurement model, whereby the Company centrally purchases the vast majority of food and paper products from approved suppliers for most of the restaurants regardless of ownership. The Company believes this central procurement model allows the Company to maintain quality control and achieves better prices and terms through volume purchases.

 

Food Safety and Quality Control

 

Food safety is the top priority at the Company. Food safety systems include rigorous standards and training of employees in our restaurants and distribution system, as well as requirements for suppliers. These standards and training topics include, but are not limited to, employee health, product handling, ingredient and product temperature management and prevention of cross contamination. Food safety training is focused on illness prevention, food safety and regulation adherence in day-to-day operations. Our standards also promote compliance with applicable laws and regulations in China when building new or renovating existing restaurants. For further information on food safety issues, see “Item 1A. Risk Factors—Risks Related to Our Business and Industry—Food safety and foodborne illness concerns may have an adverse effect on our reputation and business.”

 

Our quality assurance department regularly conducts unannounced food safety and operation excellence checks of all restaurants covering food safety, product quality and guest service. We also conduct regular product quality inspections on main menu items, and perform microbiological testing of restaurants’ utensils, small wares, water, ice and food to ensure they meet the required standards.

 

We have established a team managing delivery services for our restaurants. We require all third-party delivery companies to sign and strictly implement a letter of commitment on the food safety and quality practice of delivery food, which stipulates clear requirements for regulatory compliance, staff management, catering, delivery facilities, equipment and strict management of third-party platforms.

 

6

 

2022 Form 10-K


 

Innovation and Digitalization

 

Our vision is to become the world’s most innovative pioneer in the restaurant industry. We are dedicated to adopting innovations in our business model and restaurant operations, which enables us to comprehensively reach our guests and provide superior products and services in a technology-driven and happy way, as vividly demonstrated by our slogan “Tasty food, great fun, pleasant presentation with substance.”

 

We believe we are a pioneer and first-mover among restaurant brands in China in utilizing and investing in emerging digital technologies to modernize our business operations and accelerate our growth, which is critical to empower and maintain our competitive advantage in China. In recent years, we have stepped up our investment in digitalization, embarking on end-to-end digitalization of our business operations. In 2021, we opened a digital R&D center with three sites in Shanghai, Nanjing and Xi’an, to strengthen our internal digital capabilities and support sustainable business growth by using advanced technology.

 

Dining Experience

 

Menu Innovations

 

Offering appealing, tasty and convenient food at great prices is our value proposition. We have a dedicated food innovation team primarily focusing on the development and innovation of new recipes and improvement of existing products. In 2022, we launched over 500 new and improved products across all of our restaurant brands. Leveraging our local know-how and the wealth of consumer taste preference data accumulated, we have become a pioneer in food innovation, pushing the boundaries of QSR and CDR dining in China.

 

Our menu innovation endeavors are also supported by a world-class 27,000 square-foot innovation center in Shanghai for the development of new recipes, cooking methods and menu concepts. The innovation center is an integrated research and development facility that has been designed to generate new menu ideas and concepts with new ingredients and cooking methods to enable the rapid roll-out of innovative products catering to customers’ local tastes.

 

Ordering

 

KFC rolled out mobile pre-ordering service on a nationwide basis in December 2016, which allows guests to order online and pick up in store. Pizza Hut launched table-side mobile ordering in 2018, which enables guests to order by scanning a QR code with their mobile phone. Now mobile ordering is a standard feature of our Super Apps including the KFC Super App and the Pizza Hut Super App. Guests can also order through our proprietary mini programs embedded in WeChat. In addition, in certain commercial districts, in-store kiosks provide guests with convenient and fast digital ordering options. We continuously enhance our Super Apps to address the needs of customers and improve their digital experience. For example, in 2022, we launched a smart order system to enhance the customer experience by reducing customer wait times and providing real-time order status. In 2022, digital orders accounted for approximately 89% of KFC and Pizza Hut Company sales.

 

Payment

 

As early as June 2015, we started to partner with Alipay on digital payment functionalities, making us among the first batch of restaurant chains in China to make mobile payment available to guests. We commenced mobile payment cooperation with WeChat Pay in 2016. Digital payments accounted for an increasing percentage of our Company sales, from 33% in 2016 to 99% in 2022. The increasing percentage indicates broad consumer preference for this feature and reflects our ability to harness the power of technology in our business model. Adoption of digital and mobile payment technologies not only provides a better customer experience by, among other things, reducing guest waiting time and saving guests from having to reach for their wallets or even cellphones, but also reduces staffing needed for cash management and reduces potential risks associated with cash management. In addition to the above business relationships with major third-party mobile payment providers, we developed and launched YUMC Pay in partnership with UnionPay in the first quarter of 2019.

 

Guest loyalty and interaction

 

China has entered into an age of Super Apps, which integrates multiple functions including messaging, e-commerce and payments in a single application by embedding mini programs or providing in-App links to other applications. In early 2016, the KFC Super App was implemented nationwide. Super Apps play a very important role in our overall digital ecosystem as they enable a digital guest experience by offering convenience, efficiency and interesting functionality before, during and after dining.

 

7

 

2022 Form 10-K


 

Member engagement is fostered through our Super Apps and WeChat mini programs, as these form the primary platform for consumers to sign up for our membership programs. Additionally, we continue to monetize our membership base by introducing privilege membership subscription programs that increase frequency and spend at our brands. These monetization opportunities rely heavily on our ability to engage with our users through our Super Apps. As of December 31, 2022, KFC and Pizza Hut loyalty programs exceeded 410 million members combined. Member sales accounted for approximately 62% of system sales in 2022. We believe that creative and engaging interactions with our guests can help us enhance the guest experience and guest loyalty, which will ultimately lead to increased sales.

 

Delivery

 

We believe that food delivery is a significant growth driver in China. We were one of the first restaurant businesses in China to offer delivery services. As early as 2010, KFC established its own delivery platform and started to accept delivery orders placed on its mobile applications. Orders generated from our own delivery platforms for KFC and Pizza Hut contributed a significant portion of our delivery sales. Starting from 2015, we were also one of the first to partner with O2O aggregators to further generate delivery traffic. In addition to ordering through aggregators’ platforms, guests may also place delivery orders through the KFC and Pizza Hut Super Apps. The ability to generate orders from our own channels allows us to be well-positioned in commercial collaborations with aggregators, and manage costs and commissions in a more competitive manner.

 

We have established a team managing delivery services for our restaurants. We primarily use dedicated riders, who are managed by third-party delivery companies contracted with us, to deliver orders. These dedicated riders deliver orders exclusively for our stores, which help ensure rider availability during peak hours, delivery quality and timeliness. In 2019, Company sales through delivery accounted for approximately 21% of total Company sales, which further increased to approximately 30% for 2020, 32% in 2021 and 39% in 2022, partially driven by the increased delivery orders as a result of the COVID-19 pandemic.

 

Restaurant Format Innovation

 

To supplement our growth, we are focusing on developing new restaurant formats and upgrading existing restaurants. We have developed multiple restaurant formats to meet different guest needs. For example, our smaller store formats, with reduced store size combined with other cost reduction initiatives, enable us to penetrate further into lower-tier cities and expand more flexibly in higher-tier cities. In addition, we continuously look for ways to improve the guest experience. We continue to refresh the look of our restaurants and remodel with the latest technology, equipment and infrastructure to improve the dining experience. Approximately 73% of KFC restaurant units and 87% of Pizza Hut restaurant units as of December 31, 2022 were remodeled or built in the past five years. Our brands also look to improve efficiency to drive sales growth. For example, we have simplified our menu items and fine-tuned our in-store self-service order kiosks.

 

Operational Efficiency

 

We have made significant investments to establish an efficient technological infrastructure, which serves as the foundation of our intelligent restaurant network management and facilitates efficient and innovative restaurant operation for all restaurants across our brands. We have adopted AI-enabled technology to analyze and forecast transaction volume so that we can improve labor scheduling and inventory management. For example, the “Super Brain,” an end-to-end AI-enabled system, integrates data from store operations and aids the decision making of restaurant general managers. Moreover, managers and staff are also equipped with self-designed "smart watches", and in some pilot stores, "smart glasses", to closely monitor the real-time ordering and serving procedures of the restaurants and make timely staffing adjustments, which substantially improves management efficiency and guest satisfaction. We believe our digitalization along with automation, the Internet of Things and AI work together to enhance food safety, replace manual work and improve overall store efficiency.

 

Doing Business in China

 

Risks Related to Doing Business in China

 

Substantially all of our business operations are located in China. Accordingly, we face various legal and operational risks and uncertainties under the complex and evolving PRC laws and regulations, including the following:

Changes in Chinese political policies and economic and social policies or conditions may materially and adversely affect our business, results of operations and financial condition and may result in our inability to sustain our growth and expansion strategies.

8

 

2022 Form 10-K


 

Uncertainties with respect to the interpretation and enforcement of Chinese laws, rules and regulations could have a material adverse effect on us.
The audit report included in this Form 10-K is prepared by auditors who are located in China, and in the event the Public Company Accounting Oversight Board is unable to inspect our auditors, our common stock will be subject to potential delisting from the New York Stock Exchange.
Changes in political, business, economic and trade relations between the United States and China may have a material adverse impact on our business, results of operations and financial condition.
Fluctuation in the value of RMB may result in foreign currency exchange losses.
The increasing focus on environmental sustainability issues may create operational challenges for us, increase our costs and harm our reputation.
Interventions in or the imposition of restrictions and limitations by the PRC government on currency conversion and payments of foreign currency and RMB out of mainland China may limit our ability to utilize our cash balances effectively, including making funds held by our China-based subsidiaries unavailable for use outside of mainland China, which could limit or eliminate our ability to pay dividends and affect the value of your investment.
Changes in the laws and regulations of China or noncompliance with applicable laws and regulations may have a significant impact on our business, results of operations and financial condition, and may cause the value of our securities to decline.
We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries in China to fund offshore cash requirements.
Under the EIT Law, if we are classified as a China resident enterprise for Chinese enterprise income tax purposes, such classification would likely result in unfavorable tax consequences to us and our non-Chinese stockholders.
We and our stockholders face uncertainty with respect to indirect transfers of equity interests in China resident enterprises through transfer of non-Chinese-holding companies. Enhanced scrutiny by the Chinese tax authorities may have a negative impact on potential acquisitions and dispositions we may pursue in the future.
There may be difficulties in effecting service of legal process, conducting investigations, collecting evidence, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us and our management.
The Chinese government may determine that the variable interest entity structure of Daojia does not comply with Chinese laws on foreign investment in restricted industries.
Certain defects caused by non-registration of our lease agreements related to certain properties occupied by us in China may materially and adversely affect our ability to use such properties.
Our restaurants are susceptible to risks in relation to unexpected land acquisitions, building closures or demolitions.
Any failure to comply with Chinese regulations regarding our employee equity incentive plans may subject Chinese plan participants or us to fines and other legal or administrative sanctions.
Failure to make adequate contributions to various employee benefit plans as required by Chinese regulations may subject us to penalties.
Proceedings instituted by the Securities and Exchange Commission (the “SEC”) against certain China-based accounting firms, including our independent registered public accounting firm, could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act.
Chinese regulation of loans to, and direct investment in, Chinese entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from making loans or additional capital contributions to our Chinese subsidiaries, which may materially and adversely affect our liquidity and our ability to fund and expand our business.
Regulations regarding acquisitions may impose significant regulatory approval and review requirements, which could make it more difficult for us to pursue growth through acquisitions.
The PRC government has significant oversight and discretion to exert control over offerings of our securities conducted outside of China and foreign investment in China-based issuers, and may limit or completely hinder our ability to offer securities to investors, which may cause the value of such securities to significantly decline.

9

 

2022 Form 10-K


 

 

These risks could result in a material adverse change in our operations and the value of our shares, significantly limit or completely hinder our ability to offer or continue to offer securities to investors, or cause the value of such securities to significantly decline or become worthless. For a detailed description of risks related to doing business in China, refer to “Item 1A. Risk Factors—Risks Related to Doing Business in China.” For more information regarding the effect of government regulations on the Company, including PRC regulations, refer to “—Government Regulation.” For more information regarding the Company’s cash flows into and out of China, refer to “—Cash Flows.”

 

Cash Flows

 

Yum China is a Delaware holding company conducting substantially all of its operations in China through its China subsidiaries. Yum China derives substantially all of its revenue through its operations in China, and Yum China indirectly owns, and receives dividends from, its China subsidiaries. In addition, the Company has also generated cash from its global offering in September 2020.

 

For the year ended December 31, 2022, the Company’s China subsidiaries distributed approximately $453 million in dividends to the Company’s Hong Kong-incorporated holding companies. Dividends paid by China subsidiaries to their direct offshore parent companies are subject to Chinese withholding income tax at the rate of 10%, but Hong Kong has a tax arrangement with mainland China that provides for a 5% withholding tax on dividends upon meeting certain conditions and requirements. Once distributed outside of mainland China, the funds are freely transferrable. For the year ended December 31, 2022, the Company’s Hong Kong subsidiaries did not distribute dividends to the Company’s Delaware holding company.

 

In 2022, Yum China paid cash dividends to stockholders totaling $202 million and repurchased $466 million of its common stock. The source of funds for these dividends and repurchases was cash on hand held outside of mainland China. These dividends to stockholders and repurchases generally had no tax consequence to the Company, but may be taxable (including by way of withholding) to its stockholders. In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed into law in the U.S. The IRA contains certain tax measures, including an excise tax of 1% on net share repurchases that occur after December 31, 2022. For more information on our dividends and share repurchases, see the Consolidated Statements of Cash Flows and Note 16 to the Consolidated Financial Statements under “Item 8. Financial Statements and Supplementary Data” in this Form 10-K.

 

In addition, Yum China makes investments in its China subsidiaries through capital contributions to further support their operational and growth needs. In 2021, one of Yum China’s subsidiaries, which was incorporated in Hong Kong, made capital contributions to its subsidiaries in China totaling approximately $95 million. No such capital contributions were made in 2022. Cash may also be transferred among the Company’s China subsidiaries and their offshore holding companies by means of intercompany loans. No such intercompany loans were made in 2021 and 2022.

 

For more information regarding the Company’s cash flows, see our Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020 and the related notes to our Consolidated Financial Statements.

 

Cash Management Policies

 

The Company has comprehensive cash management policies in place, including specific policies governing approvals with respect to fund transfers throughout our organization.

 

Our board of directors and the audit committee oversee the Company’s major financial risk exposures. The Company maintains an authorization policy on cash management, setting forth the scope of authority for certain treasury matters that are delegated by the board of directors to management. Under this policy, certain treasury matters, such as intercompany loans, short-term and long-term investments and dividends distributed from the Company’s subsidiaries to the holding company, are clearly defined, with the level of approval required for each matter specifically identified.

 

Our management regularly monitors the liquidity position, funding requirements and investment returns in different jurisdictions of our subsidiaries, and takes into consideration regulatory requirements in the jurisdictions in which the Company has subsidiaries or operations. When funding is required, all necessary approvals are obtained from Company management and relevant governmental authorities, including China’s State Administration of Foreign Exchange.

 

In addition, our ability to declare and pay any dividends on our stock may be restricted by earnings available for distribution under applicable Chinese laws. See “—Government Regulation—Regulations Relating to Dividend Distribution” for more information.

 

10

 

2022 Form 10-K


 

Government Regulation

 

The Company is subject to various laws affecting its business, including the following:

Each of our restaurants in China is required to obtain (1) the relevant food business license; (2) the environmental protection assessment and inspection registration or approval; and (3) the fire safety inspection acceptance approval or other alternatives. Some of our restaurants which sell alcoholic beverages are required to make further registrations or obtain additional approvals, as described under the heading “Risk Factors—Risks Related to Doing Business in China—We require various approvals, licenses and permits to operate our business and the loss of or failure to obtain or renew any or all of these approvals, licenses and permits could adversely affect our business and results of operations;”
Cash transfers from the Company’s PRC subsidiaries to its subsidiaries outside of China are subject to PRC government control of currency conversion. Shortages in the availability of foreign currency may restrict the ability of the PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to the Company, or otherwise satisfy their foreign currency-denominated obligations. See “—Regulations Relating to Dividend Distribution” and “—Regulations Relating to Taxation” for more information;
We are subject to Chinese regulations on loans to and direct investment in Chinese entities by offshore holding companies. Thus, loans by us to our wholly-owned Chinese subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterparts of the State Administration of Foreign Exchange (“SAFE”). If we decide to finance our wholly-owned Chinese subsidiaries by means of capital contributions, in practice, we might be still required to obtain approval from China’s Ministry of Commerce (“MOFCOM”) or its local counterparts. See “Risk Factors—Risks Related to Doing Business in China—Chinese regulation of loans to, and direct investment in, Chinese entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from making loans or additional capital contributions to our Chinese subsidiaries, which may materially and adversely affect our liquidity and our ability to fund and expand our business” for more information;
We are subject to regulations relating to certain investments and acquisitions relating to businesses in China, including under the PRC Anti-monopoly Law and the Provisions of the Ministry of Commerce on M&A of a Domestic Enterprise by Foreign Investors jointly adopted by six PRC regulatory agencies, including MOFCOM, the State-Owned Assets Supervision and Administration Commission, the Chinese State Taxation Administration (“STA”), the State Administration for Industry and Commerce of the People’s Republic of China, the China Securities Regulatory Commission (“CSRC”) and SAFE. See “Risk Factors—Risks Related to Doing Business in China—Regulations regarding acquisitions may impose significant regulatory approval and review requirements, which could make it more difficult for us to pursue growth through acquisitions” for more information;
We are subject to cybersecurity regulations, including those enforced by the Cyberspace Administration of China (“CAC”) including the PRC Cybersecurity Law, which imposes tightened requirements on data privacy and cybersecurity practices, the PRC Data Security Law, which imposes data security and privacy obligations on entities and individuals carrying out data activities (including activities outside of the PRC), requires a national security review of data activities that may affect national security, and imposes restrictions on data transmissions, the PRC Personal Information Protection Law, which sets out the regulatory framework for handling and protection of personal information and transmission of personal information, among others. See “Risk Factors—Risks Related to Our Business and Industry—Unauthorized access to, or improper use, disclosure, theft or destruction of, our customer or employee personal, financial or other data or our proprietary or confidential information that is stored in our information systems or by third parties on our behalf could result in substantial costs, expose us to litigation and damage our reputation;” and

11

 

2022 Form 10-K


 

We may be subject to regulations relating to overseas securities offering and listing of China-based companies, including pursuant to the Opinions on Intensifying Crack Down on Illegal Securities Activities issued by the PRC government authorities, which called for enhanced oversight of overseas listed companies as well as overseas equity fundraising and listing by Chinese companies, and proposed measures such as the construction of regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies; the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies and the supporting guidelines issued by the CSRC, which regulate overseas securities offering and listing activities by China-based companies; the draft Regulations on Network Data Security Management issued by the CAC, which requires, among other things, that a prior cybersecurity review be conducted by the Cybersecurity Review Office before listing overseas for data processors which process over one million users’ personal information, and for the listing in Hong Kong of data processors which affect or may affect national security; the Revised Cybersecurity Review Measures, jointly issued by the National Development and Reform Commission, the Ministry of Industry and Information Technology of the PRC, and several other administrations, which require, among other things, that a network platform operator holding over one million users’ personal information must apply with the Cybersecurity Review Office for a cybersecurity review before any public offering or listing outside of mainland PRC and Hong Kong. See “Item 1A. Risk Factors—Risks Related to Doing Business in China—The PRC government has significant oversight and discretion to exert control over offerings of our securities conducted outside of China and foreign investment in China-based issuers, and may limit or completely hinder our ability to offer securities to investors, which may cause the value of such securities to significantly decline.”

 

The Company is also subject to tariffs and regulations on imported commodities and equipment and laws regulating foreign investment, as well as anti-bribery and corruption laws. Compliance with applicable laws and regulations has not had a material effect on the Company’s capital expenditures, earnings and competitive position. The Company has not historically been materially and adversely affected by such requirements or by any difficulty, delay or failure to obtain required approvals, licenses, permits, registrations or filings and has obtained all material required approvals. As of the date of this Form 10-K, no material permissions have been denied to us by relevant government authorities in China, and we have not received any inquiry, notice, warning, or sanctions regarding our business operations and corporate structure from the CSRC, CAC or any other PRC governmental agency that would have a material impact on our business, results of operations or financial condition. However, we cannot predict the effect that the compliance with laws and regulations may have on our capital expenditures, earnings and competitive position in the future, or how we may be affected if we do not receive or maintain any required permissions or approvals, inadvertently conclude that such permissions or approvals are not required, or if applicable laws, regulations or interpretations change and we are required to obtain additional permissions or approvals in the future. If (i) we have inadvertently concluded that such permissions, approvals, licenses or permits have been acquired or are not required, or (ii) applicable laws, regulations, or interpretations change and we are required to obtain such permissions, approvals, licenses or permits in the future, then we may have to expend time and costs to procure them. If we are unable to do so on commercially reasonable terms or in a timely manner, it could cause significant disruption to our business operations and damage our reputation, which would in turn have a material adverse effect on our business, results of operations and financial condition. See “Item 1A. Risk Factors” for a discussion of additional risks relating to federal, state, provincial, local and international governmental regulation of our business.

 

Regulations Relating to Dividend Distribution

 

The Chinese laws, rules and regulations applicable to our China subsidiaries permit payments of dividends only out of their accumulated profits, if any, determined in accordance with applicable accounting standards and regulations. In addition, under Chinese law, an enterprise incorporated in China is required to set aside at least 10% of its after-tax profits each year, after making up previous years’ accumulated losses, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. As a result, our China subsidiaries are restricted in their ability to transfer a portion of their net assets to us in the form of dividends. At the discretion of their board of directors, as enterprises incorporated in China, our China subsidiaries may allocate a portion of their after-tax profits based on China accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.

 

Regulations Relating to Taxation

 

Enterprise Income Tax. Under the China Enterprise Income Tax Law (the “EIT Law”) and its implementation rules, a China resident enterprise is subject to Chinese enterprise income tax in respect of its net taxable income derived from sources inside and outside China. The term “resident enterprise” refers to any enterprise established in China and any enterprise established outside China with a “de facto management body” within China.

 

12

 

2022 Form 10-K


 

Our China subsidiaries are regarded as China resident enterprises by virtue of their incorporation in China, and are generally subject to Chinese enterprise income tax on their worldwide income at the current uniform rate of 25%, unless reduced under certain specific qualifying criteria. Our China subsidiaries may deduct reasonable expenses that are actually incurred and are related to the generation of their income, including interest and other borrowing expenses, amortization of land use rights and depreciation of buildings and certain fixed assets, subject to any restrictions that may be imposed under the EIT Law, its implementation regulations and any applicable tax notices and circulars issued by the Chinese government or tax authorities.

 

Yum China and each subsidiary of Yum China that is organized outside of China intends to conduct its management functions in a manner that does not cause it to be a China resident enterprise, including by carrying on its day-to-day management activities and maintaining its key records, such as resolutions of its board of directors and resolutions of stockholders, outside of China. As such, we do not believe that Yum China or any of its non-Chinese subsidiaries should be considered a China resident enterprise for purposes of the EIT Law, and should not be subject to Chinese enterprise income tax on that basis. See “Item 1A. Risk Factors—Risks Related to Doing Business in China—Under the EIT Law, if we are classified as a China resident enterprise for Chinese enterprise income tax purposes, such classification would likely result in unfavorable tax consequences to us and our non-Chinese stockholders.”

 

Value-Added Tax and Local Surcharges. Effective on May 1, 2016, a 6% value-added tax (“VAT”) on output replaced the 5% business tax (“BT”) that has historically been applied to certain restaurant sales under the China Provisional Regulations on Business Tax. Pursuant to Circular Caishui [2016] No. 36 jointly issued by the Ministry of Finance and the Chinese State Taxation Administration (“STA”), beginning May 1, 2016, any entity engaged in the provision of catering services in China is generally required to pay VAT at the rate of 6% on revenues generated from the provision of such services, less any creditable VAT already paid or borne by such entity upon purchase of materials and services. Our new retail business is generally subject to VAT rates at 9% or 13%. The latest VAT rates imposed on our purchase of materials and services included 13%, 9% and 6%, which were gradually changed from 17%, 13%, 11% and 6% since 2017. These rate changes impact our input VAT on all materials and certain services, primarily construction, transportation and leasing. However, the impact on our operating results is not expected to be significant. Local surcharges generally ranging from 7% to 13%, varying with the location of the relevant China subsidiary, are imposed on the amount of VAT payable.

 

Repatriation of Dividends from Our China Subsidiaries. Dividends (if any) paid by our China subsidiaries to their direct offshore parent companies are subject to Chinese withholding income tax at the rate of 10%, provided that such dividends are not effectively connected with any establishment or place of the offshore parent company in China. The 10% withholding income tax rate may be reduced or exempted pursuant to the provisions of any applicable tax treaties or tax arrangements. Hong Kong has a tax arrangement with mainland China that provides for a 5% withholding tax on dividends upon meeting certain conditions and requirements, including, among others, that the Hong Kong resident enterprise directly owns at least 25% equity interests of the Chinese enterprise and is a “beneficial owner” of the dividends. We believe that our principal Hong Kong subsidiary, which is the equity holder of our Chinese subsidiaries operating substantially all of our KFC and Pizza Hut restaurants, met the relevant requirements pursuant to the tax arrangement between mainland China and Hong Kong in 2018 and is expected to meet the requirements in subsequent years, thus, it is more likely than not that our dividends or earnings expected to be repatriated to this principal Hong Kong subsidiary since 2018 are subject to the reduced withholding tax of 5%. However, if the Hong Kong subsidiary is not considered to be the “beneficial owner” of the dividends by the Chinese local tax authority, the withholding tax rate on dividends paid to it by our Chinese subsidiaries would be subject to a withholding tax rate of 10% with retrospective effect, which would increase our tax liability and reduce the amount of cash available to the Company. See “Item 1A. Risk Factors—Risks Related to Doing Business in China—We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries in China to fund offshore cash requirements.”

 

Gains on Direct Disposal of Equity Interests in Our China Subsidiaries. Under the EIT Law and its implementation rules, gains derived by non-resident enterprises from the sale of equity interests in a China resident enterprise are subject to Chinese withholding income tax at the rate of 10%. The 10% withholding income tax rate may be reduced or exempted pursuant to applicable tax treaties or tax arrangements. The gains are computed based on the difference between the sales proceeds and the original investment basis. Stamp duty is also payable upon a direct transfer of equity interest in a China resident enterprise. The stamp duty is calculated at 0.05% on the transfer value, payable by each of the transferor and transferee. We may be subject to these taxes in the event of any future sale by us of a China resident enterprise.

13

 

2022 Form 10-K


 

 

Gains on Indirect Disposal of Equity Interests in Our China Subsidiaries. In February 2015, the STA issued the STA’s Bulletin on Several Issues of Enterprise Income Tax on Income Arising from Indirect Transfers of Property by Non-resident Enterprises (“Bulletin 7”). Pursuant to Bulletin 7, an “indirect transfer” of Chinese taxable assets, including equity interests in a China resident enterprise (“Chinese interests”), by a non-resident enterprise, may be re-characterized and treated as a direct transfer of Chinese taxable assets, if such arrangement does not have reasonable commercial purpose and the transferor avoids payment of Chinese enterprise income tax. Where a non-resident enterprise conducts an “indirect transfer” of Chinese interests by disposing of equity interests in an offshore holding company, the transferor, transferee and/or the China resident enterprise being indirectly transferred may report such indirect transfer to the relevant Chinese tax authority, which may in turn report upward to the STA. Using general anti-tax avoidance provisions, the STA may treat such indirect transfer as a direct transfer of Chinese interests if the transfer avoids Chinese tax by way of an arrangement without reasonable commercial purpose. As a result, gains derived from such indirect transfer may be subject to Chinese enterprise income tax, and the transferee or other person who is obligated to pay for the transfer would be obligated to withhold the applicable taxes, currently at a rate of up to 10% of the capital gain in the case of an indirect transfer of equity interests in a China resident enterprise. Both the transferor and the party obligated to withhold the applicable taxes may be subject to penalties under Chinese tax laws if the transferor fails to pay the taxes and the party obligated to withhold the applicable taxes fails to withhold the taxes.

 

The above regulations do not apply if either (i) the selling non-resident enterprise recognizes the relevant gain by purchasing and selling equity of the same listed enterprise in the open market (the “listed enterprise exception”); or (ii) the selling non-resident enterprise would have been exempted from enterprise income tax in China pursuant to applicable tax treaties or tax arrangements, if it had directly held and transferred such Chinese interests that were indirectly transferred. The China indirect transfer rules do not apply to gains recognized by individual stockholders. However, in practice, there have been a few reported cases of individuals being taxed on the indirect transfer of Chinese interests and the law could be changed so as to apply to individual stockholders, possibly with retroactive effect. In addition, the PRC Individual Income Tax Law and relevant regulations (“IITL”), revised effective January 1, 2019, impose general anti-avoidance tax rules (“GAAR”) on transactions conducted by individuals. As a result, if the China tax authority invokes the GAAR and deems that indirect transfers made by individual stockholders lack reasonable commercial purposes, any gains recognized on such transfers might be subject to individual income tax in China at the standard rate of 20%.

 

It is unclear whether Company stockholders that acquired Yum China stock through the distribution or the Global Offering (discussed under “—Our History”) will be treated as acquiring Yum China stock in an open market purchase. If such acquisition of Yum China stock is not treated as acquired in an open market purchase, the listed transaction exception will not be available for transfers of such stock. We expect that transfers in open market transactions of our stock by corporate or other non-individual stockholders that have purchased our stock in open market transactions will not be taxable under the China indirect transfer rules due to the listed enterprise exception. Transfers, whether in the open market or otherwise, of our stock by corporate and other non-individual stockholders that acquired our stock in the distribution or the Global Offering or in non-open market transactions may be taxable under the China indirect transfer rules and our China subsidiaries may have filing obligations in respect of such transfers upon the request of relevant Chinese tax authorities. Transfers of our stock in non-open market transactions by corporate and other non-individual stockholders may be taxable under the China indirect transfer rules, whether or not such stock was acquired in open market transactions, and our China subsidiaries may have filing obligations in respect of such transfers upon the request of relevant China tax authorities. Corporate and other non-individual stockholders may be exempt from taxation under the Chinese indirect transfer rules with respect to transfers of our stock if they are tax resident in a country or region that has a tax treaty or arrangement with China that provides for a capital gains tax exemption and they qualify for that exemption.

 

Tax Cuts and Jobs Act (the “Tax Act”). In December 2017, the U.S. enacted the Tax Act, which included a broad range of tax reforms, including, but not limited to, the establishment of a flat corporate income tax rate of 21%, the elimination or reduction of certain business deductions, and the imposition of tax on deemed repatriation of accumulated undistributed foreign earnings. The Tax Act has impacted Yum China in two material aspects: (1) in general, all of the foreign-source dividends received by Yum China from its foreign subsidiaries will be exempted from taxation starting from the tax year beginning after December 31, 2017 and (2) Yum China recorded additional income tax expense in the fourth quarter of 2017, including an estimated one-time transition tax on its deemed repatriation of accumulated undistributed foreign earnings and additional tax related to the revaluation of certain deferred tax assets. The Tax Act also requires a U.S. shareholder to be subject to tax on Global Intangible Low Taxed Income (“GILTI”) earned by certain foreign subsidiaries.

 

The U.S. Treasury Department and the IRS released the final transition tax regulations in the first quarter of 2019. We completed the evaluation of the impact on our transition tax computation based on the final regulations released in the first quarter of 2019 and recorded additional income tax expense for the transition tax accordingly.

 

14

 

2022 Form 10-K


 

Inflation Reduction Act of 2022 (the “IRA”). In August 2022, the IRA was signed into law in the U.S. The IRA contains certain tax measures, including a Corporate Alternative Minimum Tax (“CAMT”) of 15% on certain large corporations and an excise tax of 1% on net share repurchases that occur after December 31, 2022. On December 27, 2022, the U.S. Treasury Department and the IRS released Notice 2023-7, announcing their intention to issue proposed regulations addressing the application of the new CAMT. Notice 2023-7 also provides interim guidance regarding certain CAMT issues and states that the U.S. Treasury Department and the IRS plan to issue additional interim guidance addressing other issues before publishing proposed regulations.

 

Hong Kong Profits Tax. Our subsidiaries incorporated in Hong Kong are generally subject to Hong Kong profits tax at a rate of 16.5%. For the years 2018 and onwards, the first HK$2 million of profits generated by one entity incorporated in Hong Kong is taxed at a rate of 8.25%, while the remaining profits will continue to be taxed at the 16.5% tax rate. In December 2022, a refined Foreign Sourced Income Exemption (“FSIE”) regime was published in Hong Kong and will take effect from January 1, 2023. Under the new FSIE regime, certain foreign soured income would be deemed as being sourced from Hong Kong and chargeable to Hong Kong Profits Tax, if the recipient entity fails to meet the prescribed exception requirements. Certain dividends, interests and disposal gains, if any, received by us and our Hong Kong subsidiaries may be subject to the new tax regime.

 

See “Item 1A. Risk Factors” for a discussion of risks relating to federal, state, local and international regulation relating to taxation of our business.

 

Holding Foreign Companies Accountable Act

 

On December 2, 2021, the SEC adopted rules (the “Final Rules”) to implement the Holding Foreign Companies Accountable Act (the “HFCAA”), which became law on December 18, 2020. The HFCAA requires the SEC to prohibit the securities of any “covered issuer” from being traded on any of the U.S. securities exchanges, including the New York Stock Exchange, or traded “over-the-counter,” if the auditor of the covered issuer’s financial statements is not subject to Public Company Accounting Oversight Board (“PCAOB”) inspection for three consecutive years, beginning in 2021. The Consolidated Appropriations Act, 2023, which became law on December 29, 2022, reduced the number of consecutive non-inspection years required to trigger the trading prohibition under the HFCAA from three years to two.

 

On December 16, 2021, the PCAOB issued a report on its determination that it was unable to inspect or investigate PCAOB-registered public accounting firms headquartered in mainland China and Hong Kong because of positions taken by Chinese authorities in those jurisdictions. Our independent registered public accounting firm, KPMG Huazhen LLP, was subject to the determinations announced by the PCAOB on December 16, 2021.

 

The HFCAA includes requirements for the SEC to identify issuers who file annual reports with audit reports issued by independent registered public accounting firms located in foreign jurisdictions that the PCAOB is unable to inspect or investigate completely because of a position taken by a non-U.S. authority in the accounting firm’s jurisdiction (“Commission-Identified Issuers”). On March 30, 2022, as expected following its adoption of the Final Rules, the SEC added Yum China to its conclusive list of Commission-Identified Issuers. The Final Rules require each Commission-Identified Issuer to submit documentation to the SEC annually on or before its annual report due date that establishes that it is not owned or controlled by a government entity in its public accounting firm’s foreign jurisdiction. The SEC will impose an initial trading prohibition on an issuer as soon as practicable after it has been conclusively identified as a Commission-Identified Issuer for two consecutive years.

 

On August 26, 2022, the PCAOB announced that it signed a Statement of Protocol with the CSRC and the Ministry of Finance, which it described as the first step toward opening access for the PCAOB to inspect and investigate completely registered public accounting firms in mainland China and Hong Kong. On December 15, 2022, the PCAOB vacated its 2021 determination that the positions taken by authorities in mainland China and Hong Kong prevented it from inspecting and investigating completely registered public accounting firms headquartered in those jurisdictions.

 

In view of the PCAOB’s decision to vacate its 2021 determination and until such time as the PCAOB issues any new adverse determination, the SEC has stated that there are no issuers at risk of having their securities subject to a trading prohibition under the HFCAA. However, whether the PCAOB will continue to be able to satisfactorily conduct inspections of PCAOB-registered public accounting firms headquartered in mainland China and Hong Kong is subject to uncertainty and depends on a number of factors out of our control. If the PCAOB again becomes unable to conduct a full inspection of our independent registered public accounting firm’s audit documentation related to their audit reports, then our common stock will again be subject to potential delisting from the New York Stock Exchange.

 

15

 

2022 Form 10-K


 

For more information regarding the risks to the Company from the HFCAA, please see “Item 1A. Risk Factors—Risks Related to Doing Business in China—The audit report included in this Form 10-K is prepared by auditors who are located in China, and in the event the PCAOB is unable to inspect our auditors, our common stock will be subject to potential delisting from the New York Stock Exchange.”

 

Intellectual Property

 

Our use of certain material trademarks and service marks is governed by a master license agreement between Yum Restaurants Consulting (Shanghai) Company Limited (“YCCL”), a wholly-owned indirect subsidiary of the Company, and Yum! Brands Inc. (“YUM”), through YRI China Franchising LLC, a subsidiary of YUM, effective from January 1, 2020 and previously through Yum! Restaurants Asia Pte. Ltd., another subsidiary of YUM, from October 31, 2016 to December 31, 2019. Pursuant to the master license agreement, we are the exclusive licensee of the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands and their related marks and other intellectual property rights for restaurant services in the PRC, excluding Hong Kong, Macau and Taiwan. The term of the license is 50 years from October 31, 2016 for the KFC and Pizza Hut brands and, subject to achieving certain agreed-upon milestones, 50 years from April 15, 2022 for the Taco Bell brand, with automatic renewals for additional consecutive renewal terms of 50 years each, subject only to us being in “good standing” and unless we give notice of our intent not to renew. In exchange, we pay a license fee to YUM equal to 3% of net system sales of the licensed brands. We have also agreed generally not to compete with YUM. In addition, we were granted a right of first refusal to develop and franchise in the PRC certain restaurant concepts that YUM may develop or acquire. On April 15, 2022, the Company and YUM, through their respective subsidiaries, entered into an amendment to the master license agreement to amend the development milestones for the Taco Bell brand. We have satisfied the measurement condition for the end of 2022, and we are committed to expanding the Taco Bell store network to at least 225 stores by the end of 2025. Subject to achieving these milestones, the Company will have the exclusive right to operate and sublicense the Taco Bell brand in China for 50 years.

 

We were granted by YUM a royalty-free license to use the name and mark of “YUM” as part of our name, domain name and stock identification symbol pursuant to a name license agreement entered into between YUM and us on October 31, 2016. The name license agreement can be terminated by YUM in the event of, among other things, material breach of the agreement by us. Our use of certain other material intellectual property (including intellectual property in product recipes, restaurant operation and restaurant design) is likewise governed by the master license agreement with YUM.

 

We own registered trademarks and service marks relating to the Little Sheep, Huang Ji Huang, COFFii & JOY and East Dawning brands and pay no license fee related to these brands. Collectively, these licensed and owned marks have significant value and are important to our business. Our policy is to pursue registration of our important intellectual property rights whenever feasible and to oppose vigorously any infringement of our rights.

 

Competition

 

Data from the National Bureau of Statistics of China indicates that sales in the consumer food service market in China totaled approximately $655 billion in 2022. Industry conditions vary by region, with local Chinese restaurants and western chains present, but we possess the largest market share (as measured by system sales). While branded QSR units per million population in China are well below that of the United States, competition in China is increasing. We compete with respect to food taste, quality, value, service, convenience, restaurant location and concept, including delivery and shared kitchens. The restaurant business is often affected by changes in consumer tastes; national, regional or local economic conditions; demographic trends; traffic patterns; the type, number and location of competing restaurants; and disposable income. We compete not only for consumers but also for management and hourly personnel and suitable restaurant sites. KFC’s competitors in China are primarily western QSR brands such as McDonald’s, Dicos and Burger King, and to a lesser extent, domestic QSR brands in China. Pizza Hut primarily competes with western CDR brands, including Domino’s and Papa John’s, as well as other domestic CDR brands in China.

 

Seasonality

 

Due to the nature of our operations, we typically generate higher sales during Chinese festivities, holiday seasons as well as summer months, but relatively lower sales and lower operating profit during the second and fourth quarters.

 

Human Capital Management

 

As of December 31, 2022, the Company had more than 400,000 employees, including approximately 145,000 full-time employees and approximately 261,000 part-time restaurant crew members. Our full-time employees primarily included 34,000 restaurant management team members and 103,000 restaurant crew members.

 

16

 

2022 Form 10-K


 

Our board of directors provides oversight on certain human capital matters, including inclusion and diversity, management succession planning, and our employee rewards and benefits program. Under the board’s oversight, the Company regularly conducts a people planning review to attract, retain and develop a workforce that aligns with our values and strategies.

 

Culture and People Philosophy

 

The Company is committed to the “People First” philosophy by implementing our principle of “Fair, Care, Pride.” In 2022, we released our Human Rights Policy, highlighting our commitment to create a workplace and a community that respect and protect human rights, which includes providing a discrimination-free and harassment-free workplace, ensuring fair compensation, creating a safe and healthy working environment, encouraging a diverse and inclusive culture, equipping employees with future employability, respecting employees’ freedom of association, prohibiting child labor and forced labor and engaging with the communities we serve and our stakeholders. Our Human Rights Policy is consistent with Yum China’s Code of Conduct.

 

The Company endorses the Universal Declaration of Human Rights adopted by the United Nations and international human rights conventions, including the International Labor Organization Declaration on Fundamental Principles and Rights at Work. We proactively identify, prevent and mitigate human rights risks in the Company and throughout the value chain. The Company implements whistleblower policies to detect and deter violations of employees’ rights, and investigates, addresses and responds to concerns raised by employees and takes appropriate corrective actions.

 

Diversity, Inclusion and Equal Opportunities

 

The Company is committed to fostering a working environment that is professional, inclusive and non-discriminatory for employees to unleash their potential. In our workplaces, differences are understood, appreciated and encouraged. Each employee, without regard to race, religion, color, age, gender or gender identity, disability, military or veteran status, sexual orientation, citizenship or national origin, is provided with fair opportunity on the Company’s diverse platform.

 

Gender Equality

 

The Company is committed to gender equality by providing fair recruitment, training and promotion opportunities for all employees. By the end of 2022, our female employees represented more than 50% of the total workforce. The Company continues to make progress in nurturing talented leaders across all management levels. By the end of 2022, women holding director and above positions represented 53% of our senior management workforce. In 2023, the Company was named to the Bloomberg Gender Equality Index for the fifth consecutive year.

 

Barrier-free and Inclusive Workplace for People with Disabilities

 

The Company strives to create a barrier-free and inclusive workplace for people with disabilities. The Company piloted the first “Angel Restaurant” in 2012, using modified equipment and operational processes, and provides training to assist “angel employees” – those with special needs – to perform a full range of jobs. By the end of 2022, we had opened 30 Angel Restaurants in 27 cities, providing jobs for nearly 200 people with special needs.

 

Training and Development

 

The Company values the growth of employees and continuously nurtures top talent through a systematic training system. Every employee is required to formulate a specific development goal to improve their competencies in addition to completing the key objectives of the role. We prepare employees not just for fulfilling current job requirements, but also for more challenging expanded job responsibilities in the future. In 2022, the number of total training hours totaled around 9 million.

 

Building Talent Pipeline

 

The Company is well-known for its career development path – the “Bench Planning” – which enables most operation leaders to grow from within. Two signature programs – the KFC Business School and the Pizza Hut Management Institute - provide systematic training and development opportunities. A new college graduate can advance to RGMs in less than two years by participating in these programs and acquiring the operational, financial and managerial knowledge required for operating a restaurant. In the long run, the programs lay a solid foundation for their future success.

 

17

 

2022 Form 10-K


 

The Company offers a tailored and fast-tracked YUMC Management Trainee Program for fresh graduate trainees in its marketing and supply chain functions. Through job rotations and targeted trainings, they are offered an opportunity to gain a thorough understanding of the business and build a foundation for becoming industry-leading professionals.

 

Digitally-powered Training Platform

 

Our training programs have tapped into the digitalization trends through the mobile learning platform, with the goal of equipping employees with the knowledge and skills necessary in the digital era and enabling their sustainable career development. The employees can easily access these training programs, even during the pandemic when face-to-face training may not be available.

 

Continuing Education Program

 

The Company sponsors a continuing education program to help employees obtain college degrees. By the end of 2022, around 5,000 employees were granted subsidies and achieved higher education degrees through our continuing education program. In addition, the Company also provides scholarships for eligible employees to achieve postgraduate degrees.

 

Total Rewards and Employee Benefits

 

The Company is committed to equal pay for equal work. Based on annual market research, it provides employees with fair and competitive compensation and benefits, recognizing and rewarding their contributions, performance and efforts.

 

In line with relevant labor laws and regulations, we provide full-time employees with pension insurance, medical insurance, unemployment insurance, work injury insurance and maternity insurance. Part-time employees are covered by employer liability insurance. Employees also enjoy paid leaves in accordance with labor laws.

 

The Company has launched equity incentive schemes such as CEO Awards and RGM Restricted Stock Units (RSUs). The scheme is part of Yum China’s long-standing commitment to its RGM No. 1 corporate culture. The Company believes that its RGMs serve as the most important leaders and are key contributors to its long-term success. In 2016, Yum China announced a grant of RSUs valued at $2,000 to each qualified RGM. As of the end of 2022, this program has allowed more than 12,500 RGMs to become stockholders of Yum China. In addition, the Company granted RSUs valued at $3,000 to all eligible RGMs starting in February 2021, covering approximately 4,000 RGMs. The turnover rate of RGMs was around 9% in 2022.

 

Recognizing the tremendous effort of our employees especially in navigating the COVID-19 pandemic, the Company has established the Yum China Employee Mutual Aid Fund to offer financial assistance to employees in need. Fully financed by the Company, the RMB 10 million fund will provide monetary support to employees in the event of emergencies, critical illness or financial difficulties. The fund adds to the Company’s well-recognized employee care program, including the RMB 1 million medical insurance coverage for each RGM, family care scheme for restaurant management teams, and critical illness insurance for service team leaders.

 

For office staff, the Company operates its flexible benefit platform, covering more than 6,000 employees. The platform allows employees to select benefits based on their individual needs, including family medical insurance, medical examination and recreational activities. Both office staff and RGMs are covered by the Company’s housing subsidy scheme.

 

Health and Safety

 

Protecting the health and safety of employees is the Company's top priority. Leveraging the Yum China Occupational Health and Safety (“OH&S”) Management System, we provide necessary education, training, equipment and resources to help ensure that our employees, customers and partners fully understand and comply with relevant regulations, policies and procedures. We have also clearly defined the structure and accountability for the effective management of OH&S in Yum China. The Company regularly inspects and upgrades employees’ protective equipment, carries out workplace safety reviews, and trains all employees on operational procedures and safety precautions.

 

In addition, Yum China’s Employee Assistance Program (“EAP”) continues to provide professional counseling and educational sessions to promote employees’ physical and mental health. For example, by leveraging the EAP program, the Company was able to offer stress management tips to employees when they underwent quarantine during the pandemic.

 

18

 

2022 Form 10-K


 

Engagement and Wellbeing

 

The Top Employers Institute has certified the Company as a Top Employer China for the fifth consecutive year. Yum China’s 2023 Top Employer China ranking is the best in the restaurant industry in China.

 

The Company maintains multiple communication channels with employees, including organizational forums such as RGM Convention and Founders’ Day. The Company also ensures effective communication of business strategies and corporate messages through various digital platforms such as corporate WeChat, Apps and intranet portals.

 

Environmental Matters

 

We strive to reduce the environmental impact of our business activities by incorporating sustainability into the daily operations of our restaurants, as well as focusing our efforts on climate action, circular economy and supply chain environmental impact.

 

Climate Action

 

Our commitment to enhance climate action tops the list of our environmental sustainability priorities. We are committed to reaching net-zero value chain GHG emissions by 2050, and have set near-term science-based targets (SBTs) by 2035.

 

Our near-term SBTs are:

Reduce absolute Scope 1 and 2 GHG emissions 63% by 2035 from a 2020 base year.
Reduce Scope 3 GHG emissions from purchased goods 66.3% per ton of goods purchased by 2035 from a 2020 base year.

 

We have developed a 1.5°C-aligned decarbonization strategy and roadmap, focusing on energy efficiency improvement, renewable energy investment and supplier engagement. We identified and assessed climate-related risks and opportunities in our operations and value chain in line with the recommendations of the Task Force on Climate-Related Financial Disclosure (“TCFD”), and released our first TCFD report in 2022. In 2022, we also participated in the CDP Questionnaire for the second year.

 

Circular Economy

 

Food Loss and Waste

 

We are working toward the goal of a 10% reduction of our food waste per restaurant by 2030, as compared to a 2020 baseline, by exploring innovative initiatives for food loss reduction across different stages of the value chain. For example, we use AI/IoT technology to improve sales forecasting accuracy and inventory management, increase the proportion of cold chain transportation and use smaller fryers to avoid excessive cooking. We continue to promote and extend our food bank project by establishing pick-up stations at more restaurants under more brands, providing surplus food for free to residents in need. We also strive to explore solutions to recycle and reuse waste, such as recycling used cooking oil as resources in the Company’s value chain through collaboration with various stakeholders.

 

Sustainable Packaging

 

We continue to reduce packaging and waste through design optimization, material replacement, and innovative application methods. We are committed to ensuring that 100% of customer facing, plastic-based packaging is recyclable. We are working toward our target of a 30% reduction of non-degradable plastic packaging weight by 2025, as compared to a 2019 baseline.

 

Supply Chain Environmental Impact

 

Building a sustainable supply chain is a key component of our sustainability strategy. We have set an ambitious goal to achieve a zero-deforestation supply chain. By continuously strengthening traceability in the upstream supply chain, we strive to source in a sustainable way, including our goal of sourcing 100% RSPO-certified palm oil, as well as 100% FSC-certified paper packaging by 2025.

 

19

 

2022 Form 10-K


 

Nutrition

 

We advocate a balanced diet and healthy eating habits through product innovation, variety in offerings, industry communication, public education and other relevant measures. We have increased the offering of grains, fruits, vegetables and beans in our menus to promote balanced food choices. We have collaborated with scientific institutions to promote dietary health for 15 years. Chinese Nutrition Society - Yum China Dietary Health Foundation has now become one of the largest and most influential special research foundations in China in the field of health and nutrition. We also cooperate with the China Foundation for Rural Development to encourage public donations to improve child nutrition in rural areas.

 

Information about our Executive Officers

 

The executive officers of the Company as of February 28, 2023, and their ages and current positions as of that date, are as follows:

 

Name

 

Age

 

 

Title

Joey Wat

 

 

51

 

 

Chief Executive Officer

Andy Yeung

 

 

50

 

 

Chief Financial Officer

Warton Wang

 

 

48

 

 

General Manager, KFC

Jeff Kuai

 

 

42

 

 

General Manager, Pizza Hut

Duoduo (Howard) Huang

 

 

50

 

 

Chief Supply Chain Officer

Johnson Huang

 

 

60

 

 

Chief Customer Officer

Leila Zhang



 

54

 



Chief Technology Officer

Joseph Chan



 

54

 

 

Chief Legal Officer

Aiken Yuen

 

 

63

 

 

Chief People Officer

Xueling Lu

 

 

49

 

 

Controller and Principal Accounting Officer

 

Joey Wat has served as our Chief Executive Officer since March 2018 and as a member of our board of directors since July 2017. She served as our President and Chief Operating Officer from February 2017 to February 2018 and the Chief Executive Officer, KFC from October 2016 to February 2017, a position she held at Yum! Restaurants China, from August 2015 to October 2016. Ms. Wat joined Yum! Restaurants China in September 2014 as President of KFC China and was promoted to Chief Executive Officer for KFC China in August 2015. Before joining YUM, Ms. Wat served in both management and strategy positions at A.S. Watson Group (“Watson”), an international health, beauty and lifestyle retailer, in the U.K. from 2004 to 2014. Her last position at Watson was managing director of Watson Health & Beauty U.K., which operates Superdrug and Savers, two retail chains specializing in the sale of pharmacy and health and beauty products, from 2012 to 2014. She made the transition from head of strategy of Watson in Europe to managing director of Savers in 2007. Before joining Watson, Ms. Wat spent seven years in management consulting including with McKinsey & Company’s Hong Kong office from 2000 to 2003. Ms. Wat was ranked number 34 on Forbes World’s Most Powerful Women list in 2020, named by FORTUNE magazine as one of the Top 25 China Most Powerful Women in Business in 2017, 2018 and 2020, and the Top 50 Most Powerful Women in International Business in 2018, 2019, 2020. She was also named to Business Insider 100 People Transforming Business Asia List in 2020.

 

Andy Yeung has served as our Chief Financial Officer since October 2019. Prior to joining Yum China, Mr. Yeung served as the chief financial officer of Smart Finance International Limited, a financial technology company, from April 2017 to August 2019. Between January 2014 and March 2017, he served as the chief financial officer of Cheetah Mobile Inc., a NYSE-listed mobile internet company (NYSE: CMCM) where he led its successful IPO and built its finance, internal control and investor relations functions. From 2009 to 2013, Mr. Yeung worked at Oppenheimer & Co. Inc. as director, executive director and then managing director, responsible for research coverage of the internet and media sectors in China. From 2004 to 2009, Mr. Yeung was an associate in equity research at Thomas Weisel Partners. He has been a Chartered Financial Analyst charterholder since 2001.

 

Warton Wang has served as the General Manager, KFC since May 2022. Mr. Wang served as our Chief Development Officer from July 2020 to June 2022. Mr. Wang joined KFC as an operations management trainee in 1998. He was promoted to Market Manager of KFC in 2007 and was appointed as a Regional Vice President, KFC Field Operations in 2015.

 

Jeff Kuai has served as the General Manager, Pizza Hut since November 2017. Mr. Kuai previously served as the General Manager, Pizza Hut Home Service from October 2016 to October 2017, a position he held at Yum! Restaurants China from January 2015 to October 2016. From March 2012 to August 2013, Mr. Kuai was Director of Delivery Support Center for Yum! Restaurants China, where he was instrumental in building its online ordering and e-commerce capabilities. Prior to that, Mr. Kuai spent nine years in the information technology department of Yum! Restaurants China, enhancing its information technology infrastructure and productivity.

 

20

 

2022 Form 10-K


 

Duoduo (Howard) Huang has served as our Chief Supply Chain Officer since November 2021. Mr. Huang served as Vice President, Pizza Hut Regional Operations, from June 2018 to November 2021. Before transferring to Pizza Hut, Mr. Huang held various leadership positions in KFC, including as General Manager of Nanjing and Wuxi markets. Mr. Huang joined Yum! Restaurants China in 1995.

 

Johnson Huang has served as our Chief Customer Officer since May 2022. Mr. Huang served as the General Manager, KFC from February 2017 to April 2022. He served as our Chief Information and Marketing Support Officer from October 2016 to February 2017, a position he held at Yum! Restaurants China from September 2014 to October 2016. Mr. Huang joined YUM in 2006 to lead the information technology department in China. He served as vice president of information technology from September 2008 to January 2013 and Chief Information Officer from January 2013 to September 2014. Mr. Huang has been the key architect of Yum! Restaurants China’s digital strategy and information technology roadmap in China. Prior to joining YUM, Mr. Huang held various information technology and business leadership positions with Capgemini Asia Pacific Pte, Ltd. in Taiwan and the greater China region.

 

Leila Zhang has served as our Chief Technology Officer since March 2018. Ms. Zhang served as Vice President, Information Technology from October 2016 to March 2018, a position she held at Yum! Restaurants China from 2014 to October 2016. Ms. Zhang joined YUM in 1996, held various positions in the information technology department, and began leading the department in February 2017. Prior to joining YUM, Ms. Zhang was an engineer with Inventec Electronics (Shanghai) from 1992 to 1996.

 

Joseph Chan has served as our Chief Legal Officer since June 2019. Prior to joining Yum China, Mr. Chan was a partner at Sidley Austin, a U.S. based international law firm, in Shanghai, from November 2010 to May 2019, where he managed and executed large complex multi-jurisdictional legal matters with a focus on mergers and acquisitions and corporate finance transactions across a variety of industries. In addition, Mr. Chan spent over a decade with Pillsbury Winthrop Shaw Pittman, a U.S. based international law firm, in San Francisco and Shanghai, initially as an associate and then a partner. He established the Shanghai office of Pillsbury Winthrop Shaw Pittman in 2006 and served in various leadership positions, including serving as its inaugural managing partner. Mr. Chan is admitted to the bar in California and Pennsylvania in the U.S. and British Columbia in Canada. For many consecutive years he was ranked and recommended by Chambers Asia, IFLR and Legal 500 as a leading lawyer in Asia.

 

Aiken Yuen has served as our Chief People Officer since March 2018. Mr. Yuen served as Vice President, Human Resources of Yum China from October 2016 to February 2018, a position he held at Yum! Restaurants China from March 2012 to October 2016. Mr. Yuen joined YUM in 2008 as the Talent Management and Development Director. Prior to joining YUM, Mr. Yuen served in senior HR management positions at American International Group (“AIG”) in Hong Kong from 1998 to 2008. His last position at AIG was Vice President, Human Resources of AIA, AIG’s life insurance business unit for South East Asia. He was responsible for overall human resources strategy formulation and execution for AIA’s Head Office in Hong Kong and its operations in six Asian countries. Before that, he was the Senior Manager of Training and Development with Standard Chartered Bank from 1996 to 1998 and Manager of Management Training with HSBC from 1994 to 1996.

 

Xueling Lu has served as our Controller and Principal Accounting Officer since January 2018. Ms. Lu previously served as Senior Director, Finance of Yum China, a position she held since she joined the Company in November 2016. Prior to joining the Company, Ms. Lu was the Asia Pacific Controller of Lear Corporation from 2013 to 2016. Before joining Lear Corporation, Ms. Lu spent 10 years in public accounting with Ernst & Young, specializing in audits and initial public offerings of companies listed in the U.S., SEC reporting and Sarbanes-Oxley compliance. Ms. Lu is a certified public accountant in California and a member of the American Institute of Certified Public Accountants.

 

21

 

2022 Form 10-K


 

Enforceability

 

Our executive officers, including our Chief Executive Officer and Chief Financial Officer, and a majority of our directors reside within mainland China and/or Hong Kong or spend significant amounts of time in mainland China and/or Hong Kong. As a result, it may not be possible to effect service of process upon these persons, to obtain information from such persons necessary for investigations or lawsuits, or to bring lawsuits or enforcement actions or enforce judgments against such persons. For more information, see “Item 1A. Risk Factors—Risks Related to Doing Business in China—There may be difficulties in effecting service of legal process, conducting investigations, collecting evidence, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us and our management.”

 

Our History

 

Yum China was incorporated in Delaware on April 1, 2016. The Company separated from YUM on October 31, 2016 (the “separation”), becoming an independent, publicly traded company as a result of a pro rata distribution (the “distribution”) of all outstanding shares of Yum China common stock to shareholders of YUM. On October 31, 2016, YUM’s shareholders of record as of 5:00 p.m. Eastern Time on October 19, 2016 received one share of Yum China common stock for every one share of YUM common stock held as of the record date. Common stock of Yum China began trading “regular way” under the ticker symbol “YUMC” on the New York Stock Exchange (“NYSE”) on November 1, 2016. On September 10, 2020, the Company completed its secondary listing on the Main Board of the Hong Kong Stock Exchange (“HKEX”) under the stock code “9987,” in connection with a global offering (the “Global Offering”) of shares of its common stock. On October 24, 2022, the Company’s voluntary conversion of its secondary listing status to a primary listing status on the HKEX became effective and the Company became a dual primary listed company on the NYSE and HKEX. On the same day, the Company’s shares of common stock traded on the HKEX were included in the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect.

 

Available Information

 

For important news and information regarding Yum China, including our filings with the SEC and the HKEX, visit Yum China’s Investor Relations website at http://ir.yumchina.com. Yum China uses this website as a primary channel for disclosing key information to its investors, some of which may contain material and previously non-public information.

 

The Company makes available through the Investor Relations website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after electronically filing such material with the SEC. These reports may also be obtained by visiting the SEC’s website at http://www.sec.gov.

 

The reference to the Company’s website address and the SEC’s website address is for informational purposes only, does not constitute incorporation by reference of the information contained on the websites and should not be considered part of this Form 10-K. These documents, as well as our SEC filings, are available in print free of charge to any stockholder who requests a copy from our Investor Relations Department by contacting Yum China at 101 East Park Boulevard, Suite 805, Plano, Texas 75074 United States of America, Attention: Investor Relations.

 

22

 

2022 Form 10-K


 

Item 1A. Risk Factors.

 

You should carefully consider each of the following risks, as well as the information included elsewhere in this report, before deciding to invest in our common stock or otherwise in connection with evaluating our business. Based on the information currently known to us, we believe that the following information identifies the most material risk factors affecting us in each of these categories of risk. However, additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business, financial condition or results of operations. In addition, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. If any of the following risks and uncertainties develops into actual events, these events could have a material adverse effect on our business, financial condition or results of operations. In such case, the trading price of our common stock could decline.

 

Summary of Risk Factors

 

We are exposed to a variety of risks, which have been separated into five general groups:

Risks related to our business and industry, including (a) food safety and foodborne illness concerns, (b) significant failure to maintain effective quality assurance systems for our restaurants, (c) significant liability claims, food contamination complaints from our customers or reports of incidents of food tampering, (d) health concerns arising from outbreaks of viruses or other illnesses, including the COVID-19 pandemic, (e) the fact that the operation of our restaurants is subject to the terms of the master license agreement with YUM, (f) the fact that substantially all of our revenue is derived from our operations in China, (g) the fact that our success is tied to the success of YUM’s brand strength, marketing campaigns and product innovation, (h) shortages or interruptions in the availability and delivery of food products and other supplies, (i) fluctuation of raw materials prices, (j) our inability to attain our target development goals, the potential cannibalization of existing sales by aggressive development and the possibility that new restaurants will not be profitable, (k) risks associated with leasing real estate, (l) inability to obtain desirable restaurant locations on commercially reasonable terms, (m) labor shortages or increases in labor costs, (n) the fact that our success depends substantially on our corporate reputation and on the value and perception of our brands, (o) the occurrence of security breaches and cyber-attacks, (p) failure to protect the integrity and security of our customer or employee personal, financial or other data or our proprietary or confidential information that is stored in our information systems or by third parties on our behalf, (q) failures or interruptions of service or security breaches in our information technology systems, (r) the fact that our business depends on the performance of, and our long-term relationships with, third-party mobile payment processors, internet infrastructure operators, internet service providers and delivery aggregators, (s) failure to provide timely and reliable delivery services by our restaurants, (t) our growth strategy with respect to Lavazza may not be successful, (u) the anticipated benefits of our acquisitions may not be realized in a timely manner or at all, (v) challenges and risks related to our new retail and e-commerce businesses, (w) our inability or failure to recognize, respond to and effectively manage the impact of social media, (x) failure to comply with anti-bribery or anti-corruption laws, (y) U.S. federal income taxes, changes in tax rates, disagreements with tax authorities and imposition of new taxes, (z) changes in consumer discretionary spending and general economic conditions, (aa) the fact that the restaurant industry in which we operate is highly competitive, (bb) loss of or failure to obtain or renew any or all of the approvals, licenses and permits to operate our business, (cc) our inability to adequately protect the intellectual property we own or have the right to use, (dd) our licensor’s failure to protect its intellectual property, (ee) seasonality and certain major events in China, (ff) our failure to detect, deter and prevent all instances of fraud or other misconduct committed by our employees, customers or other third parties, (gg) the fact that our success depends on the continuing efforts of our key management and experienced and capable personnel as well as our ability to recruit new talent, (hh) our strategic investments or acquisitions may be unsuccessful; (ii) our investment in technology and innovation may not generate the expected level of returns, (jj) fair value changes for our investment in equity securities and lower yields of our short-term investments may adversely affect our financial condition and results of operations, and (kk) our operating results may be adversely affected by our investment in unconsolidated affiliates;
Risks related to doing business in China, including (a) changes in Chinese political policies and economic and social policies or conditions, (b) uncertainties with respect to the interpretation and enforcement of Chinese laws, rules and regulations, which may be subject to change from time to time with little advance notice, and the risk that the PRC government may intervene or influence our operations at any time, which could result in a material change in our operations and/or the value of our securities to decline, (c) the audit report included in this Form 10-K is prepared by auditors who are located in China, and in the event the PCAOB is unable to inspect our auditors, our common stock will be subject to potential delisting from the New York Stock Exchange, (d) changes in political, business, economic and trade relations between the United States and China, (e) fluctuation in the value of the Chinese Renminbi, (f) the fact that we face increasing focus on environmental sustainability issues, (g) limitation on our ability to utilize our cash balances effectively, including making funds held by our China-based subsidiaries unavailable for use outside of mainland China, due to interventions in or the imposition of

23

 

2022 Form 10-K


 

restrictions and limitations by the PRC government on currency conversion and payments of foreign currency and RMB out of mainland China, (h) changes in the laws and regulations of China or noncompliance with applicable laws and regulations, (i) reliance on dividends and other distributions on equity paid by our principal subsidiaries in China to fund offshore cash requirements, (j) potential unfavorable tax consequences resulting from our classification as a China resident enterprise for Chinese enterprise income tax purposes, (k) uncertainty regarding indirect transfers of equity interests in China resident enterprises and enhanced scrutiny by Chinese tax authorities, (l) difficulties in effecting service of legal process, conducting investigations, collecting evidence, enforcing foreign judgments or bringing original actions in China against us, (m) the Chinese government may determine that the variable interest entity structure of Daojia does not comply with Chinese laws on foreign investment in restricted industries, (n) inability to use properties due to defects caused by non-registration of lease agreements related to certain properties, (o) risk in relation to unexpected land acquisitions, building closures or demolitions, (p) potential fines and other legal or administrative sanctions for failure to comply with Chinese regulations regarding our employee equity incentive plans and various employee benefit plans, (q) proceedings instituted by the SEC against certain China-based accounting firms, including our independent registered public accounting firm, could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act, (r) restrictions on our ability to make loans or additional capital contributions to our Chinese subsidiaries due to Chinese regulation of loans to, and direct investment in, Chinese entities by offshore holding companies and governmental control of currency conversion, (s) difficulties in pursuing growth through acquisitions due to regulations regarding acquisitions, and (t) the PRC government has significant oversight and discretion to exert control over offerings of securities conducted outside of China and over foreign investment in China-based issuers, and may limit or completely hinder our ability to offer securities to investors, or cause the value of our securities to significantly decline; these risks are each discussed in detail in the section “Risks Related to Doing Business in China.”
Risks related to the separation and related transactions, including (a) incurring significant tax liabilities if the distribution does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes and the Company could be required to indemnify YUM for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement, (b) being obligated to indemnify YUM for material taxes and related amounts pursuant to indemnification obligations under the tax matters agreement if YUM is subject to Chinese indirect transfer tax with respect to the distribution, (c) potential indemnification liabilities owing to YUM pursuant to the separation and distribution agreement, (d) the indemnity provided by YUM to us with respect to certain liabilities in connection with the separation may be insufficient to insure us against the full amount of such liabilities, (e) the possibility that a court would require that we assume responsibility for obligations allocated to YUM under the separation and distribution agreement, and (f) potential liabilities due to fraudulent transfer considerations;
Risks related to our common stock, including (a) the fact that we cannot guarantee the timing or amount of dividends on, or repurchases of, our common stock, (b) the impact on the trading prices of our common stock due to different characteristics of the capital markets in Hong Kong and the U.S., (c) different interests between Primavera and Ant Financial and other holders of our common stock, and (d) the existence of anti-takeover provisions that may discourage or delay acquisition attempts that you might consider favorable; and
General risk factors.

 

Risks Related to Our Business and Industry

 

Food safety and foodborne illness concerns may have an adverse effect on our reputation and business.

 

Foodborne illnesses, such as E. coli, hepatitis A and salmonella, have occurred and may re-occur within our system from time to time. In addition, food safety issues such as food tampering, contamination and adulteration occur or may occur within our system from time to time. Any report or publicity linking us, our competitors, our restaurants, including restaurants operated by us or our franchisees, to instances of foodborne illness or food safety issues could adversely affect our restaurants’ brands and reputations as well as our revenues and profits and possibly lead to product liability claims, litigation and damages. If a customer of our restaurants becomes ill from foodborne illnesses or as a result of food safety issues, restaurants in our system may be temporarily closed, which would decrease our revenues. In addition, instances or allegations of foodborne illness or food safety issues, real or perceived, involving our or YUM’s restaurants, restaurants of competitors, or suppliers or distributors (regardless of whether we use or have used those suppliers or distributors), or otherwise involving the types of food served at our restaurants, could result in negative publicity that could adversely affect our sales. The occurrence of foodborne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, which could result in disruptions in our supply chain and/or lower margins for us and our franchisees.

 

24

 

2022 Form 10-K


 

In October 2019, China’s State Council amended the Regulation for the Implementation of the Food Safety Law (the “Regulation of Food Safety Law”), which became effective on December 1, 2019. The Regulation of Food Safety Law outlines detailed rules for food safety assessment, food safety standards, food production and food business, food inspection and other matters. Pursuant to the Regulation of Food Safety Law, certain violations of the food safety law may result in severe administrative and criminal penalties imposed on the Company, as well as its legal representatives, senior management members and other employees. If penalties are imposed on our senior management members, they may be prevented from performing their duties at the Company, which could in turn negatively affect our business operations. Such penalties could also have a material adverse impact on the Company’s reputation.

 

Any significant failure to maintain effective quality assurance systems for our restaurants could have a material adverse effect on our business, reputation, results of operations and financial condition.

 

The quality and safety of the food we serve is critical to our success. Maintaining consistent food quality depends significantly on the effectiveness of our and our franchisees’ quality assurance systems, which in turn depends on a number of factors, including the design of our quality control systems and employee implementation and compliance with those quality control policies and guidelines. Our quality assurance systems include, but are not limited to, supplier/food processing plant quality assurance, logistics quality assurance, and restaurant quality assurance. There can be no assurance that our and our franchisees’ quality assurance systems will prove to be effective. Any significant failure of or deviation from these quality assurance systems could have a material adverse effect on our business, reputation, results of operations and financial condition.

 

Any significant liability claims, food contamination complaints from our customers or reports of incidents of food tampering could adversely affect our business, reputation, results of operations and financial condition.

 

Being in the restaurant industry, we face an inherent risk of food contamination and liability claims. Our food quality depends partly on the quality of the food ingredients and raw materials provided by our suppliers, and we may not be able to detect all defects in our supplies. Any food contamination occurring in raw materials at our suppliers’ food processing plants or during the transportation from food processing plants to our restaurants that we fail to detect or prevent could adversely affect the quality of the food served in our restaurants. Due to the scale of our and our franchisees’ operations, we also face the risk that certain of our and our franchisees’ employees may not adhere to our mandated quality procedures and requirements. Any failure to detect defective food supplies, or observe proper hygiene, cleanliness and other quality control requirements or standards in our operations could adversely affect the quality of the food we offer at our restaurants, which could lead to liability claims, complaints and related adverse publicity, reduced customer traffic at our restaurants, the imposition of penalties against us or our franchisees by relevant authorities and compensation awards by courts. Our sales have been significantly impacted by adverse publicity relating to supplier actions over the past decade. For example, our sales and perception of our brands were significantly impacted following adverse publicity relating to the failure of certain upstream poultry suppliers to meet our standards in late 2012 as well as adverse publicity relating to improper food handling practices by another supplier in mid-2014. There can be no assurance that similar incidents will not occur again in the future or that we will not receive any food contamination claims or defective products from our suppliers in the future. Any such incidents could materially harm our business, reputation, results of operations and financial condition.

 

Health concerns arising from outbreaks of viruses or other illnesses may have a material adverse effect on our business. The COVID-19 pandemic has had, and may continue to have, adverse effects on our results of operations, cash flows and financial condition.

 

Our business could be materially and adversely affected by the outbreak of a widespread health epidemic, such as COVID-19, avian flu or African swine flu. Outbreaks of contagious illness occur from time to time around the world, including in China where virtually all of our restaurants are located. The occurrence of such an outbreak or other adverse public health developments in China could materially disrupt our business and operations, including if government authorities impose mandatory closures, seek voluntary closures or impose restrictions on operations of restaurants. Furthermore, the risk of contracting viruses or other illnesses that may be transmitted through human contact could cause employees or guests to avoid gathering in public places or interacting with other people, which could materially and adversely affect restaurant guest traffic or the ability to adequately staff restaurants. An outbreak could also cause disruption in our supply chain, increase our raw material costs, increase operational complexity and adversely impact our ability to provide safety measures to protect our employees and customers, which could materially and adversely affect our continuous operations. Our operating costs may also increase as a result of taking precautionary measures to protect the health and wellbeing of our customers and employees during an outbreak. If an outbreak reaches pandemic levels, there may also be long-term effects on the economies of affected countries. Any of the foregoing within China would severely disrupt our operations and could have a material adverse effect on our business, results of operations, cash flows and financial condition.

25

 

2022 Form 10-K


 

 

For example, starting in the first quarter of 2020 and throughout 2021 and 2022, the COVID-19 pandemic significantly impacted the restaurant industry in China. Strict public health measures were implemented across the country, including mass testing, regional lockdowns and travel restrictions. These actions led to reduced travel, fewer social activities and softened consumption demand. During peak outbreak periods, hundreds of millions of people were under some type of lockdown in multiple regions in China. The COVID-19 pandemic significantly affected the Company’s operations, resulting in severe impact on our financial results mainly driven by same-store sales declines and temporary store closures.

 

In 2022, severe COVID-19 outbreaks in China resulted in significant disruptions to our business operations. During April and May 2022, over 2,500 of our stores in China, on average, were either temporarily closed or offered only takeaway and delivery services. During such period, same-store sales declined by more than 20% year over year. In October and November 2022, sporadic occurrences of COVID infections quickly evolved into major regional outbreaks, leading to tightened COVID-related health measures and lockdowns. The number of our stores that were either temporarily closed or offered only takeaway and delivery services reached a peak of over 4,300 stores in late November 2022. In December 2022, the government issued a series of new COVID response guidelines that significantly changed its COVID policies, including removing mass testing and central quarantine requirements as well as lifting travel restrictions. Due to widespread infections following the relaxation of COVID restrictions, we experienced a shortage of restaurant staff, which led to over 1,300 stores on average being either temporarily closed or offering limited services in December 2022. As a significant portion of the population was either infected or chose to stay home to avoid infection, dine-in traffic declined substantially.

 

We expect that our operations will continue to be impacted by the COVID-19 pandemic. Experiences in other countries suggest that further outbreaks following relaxation of COVID restrictions and emergence of different COVID variants may occur. A portion of the population may remain cautious about going out in public. In addition, consumers tend to be more careful with spending after holidays. It remains difficult to predict how consumer behavior will change in the long-term. The extent to which our operations continue to be impacted by the pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including resurgences and further spread of existing or new COVID-19 variants, actions by the government authorities to contain the pandemic or treat its impact, the economic recovery within China and globally, the impact on consumer behavior and other related factors. Our insurance policy does not cover any losses we incur as a result of the pandemic. The COVID-19 pandemic also may have the effect of heightening other risks disclosed in the “Risk Factors” section of this report, such as, but not limited to, those related to supply chain management, labor shortage and cost, cybersecurity threats, as well as consumer perceptions of our brands.

 

Even if a virus or other illness does not spread significantly, the perceived risk of infection or health risk may affect our business. Our operations could also be disrupted if any of our employees or employees of our business partners were suspected of having a contagious illness or susceptible to becoming infected with a contagious illness, since this could require us or our business partners to screen and/or quarantine some or all of such employees or disinfect our restaurant facilities.

 

With respect to the avian flu, public concern over an outbreak may cause fear about the consumption of chicken, eggs and other products derived from poultry, which could cause customers to consume less poultry and related products. This would likely result in lower revenues and profits. Avian flu outbreaks could also adversely affect the price and availability of poultry, which could negatively impact our profit margins and revenues.

 

The operation of our restaurants is subject to the terms of the master license agreement which, if terminated or limited, would materially adversely affect our business, results of operations and financial condition.

 

Under the master license agreement with YUM, we are required to meet a Sales Growth Metric, which requires the average annual Gross Revenue (as defined in the master license agreement) for each of the KFC, Pizza Hut and Taco Bell brands for each rolling five (5) calendar year period throughout the term of the master license agreement (“Measurement Period”), beginning January 1, 2017, to exceed the annual Gross Revenue of the calendar year immediately preceding the corresponding Measurement Period (“Benchmark Year”), unless otherwise agreed by the parties. To illustrate, the first Measurement Period was January 1, 2017 through December 31, 2021 (corresponding to the first Benchmark Year of January 1, 2016 through December 31, 2016) and the second Measurement Period is January 1, 2018 through December 31, 2022 (corresponding to the second Benchmark Year of January 1, 2017 through December 31, 2017).

 

26

 

2022 Form 10-K


 

The requirement regarding the Sales Growth Metric began at the end of the first Measurement Period on December 31, 2021. Within an agreed period after the beginning of each calendar year following December 31, 2021, and during the term of the master license agreement, we are required to provide to YUM a written statement with the calculations of the Sales Growth Metric. If our calculations indicate that any of these restaurant brands failed to meet the Sales Growth Metric (an “SGM Breach”), there is a mechanism under the master license agreement for us to explain and remediate such breach in good faith. YUM has the right to terminate the master license agreement in the event of an SGM Breach. In the event of two consecutive SGM Breaches for KFC, Pizza Hut or Taco Bell, YUM shall be entitled to exercise its right to eliminate or modify the exclusivity of the license granted to us and conduct and further develop the relevant restaurant brand in our licensed territory or license one or more third parties to do so.

 

As a result of factors beyond the Company’s control, namely the severe impact of the COVID-19 pandemic, Pizza Hut was not able to meet the Sales Growth Metric for the second Measurement Period ending December 31, 2022, which constitutes a breach of the master license agreement. YUM has waived this SGM Breach. However, Pizza Hut will likely not be able to meet the Sales Growth Metric for the next two Measurement Periods, given the inclusion of three COVID-19 years (2020, 2021 and 2022) in those periods. Unless YUM also waives those additional SGM Breaches, YUM may exercise its rights under the master license agreement described herein.

 

The master license agreement may also be terminated upon the occurrence of certain events. We do not believe there has been any material breach of the master license agreement, and we actively monitor our compliance with the terms of the master license agreement on an on-going basis. Under the master license agreement, we have the right to cure any breach of the agreement, except for the dissolution, liquidation, insolvency or bankruptcy of the Company or upon the occurrence of an unauthorized transfer or change of control or other breach that YUM determines will not or cannot be cured. Upon the occurrence of a non-curable breach, YUM will have the right to terminate the master license agreement (or our rights to a particular brand) on delivery of written notice. Upon the occurrence of a curable breach, YUM will provide a notice of breach that sets forth a cure period that is reasonably tailored to the applicable breach. If we do not cure the breach, YUM will have the right to terminate the master license agreement (or our rights to a particular brand). The master license agreement also contemplates remedies other than termination that YUM may use as appropriate. These remedies include: actions for injunctive and/or declaratory relief (including specific performance) and/or damages; limitations on our future development rights or suspension of restaurant operations pending a cure; modification or elimination of our territorial exclusivity; and YUM’s right to repurchase from us the business operated under an affected brand at fair market value, less YUM’s damages.

 

In the second quarter of 2022, we invoked the dispute resolution process pursuant to the master license agreement to resolve a disagreement with YUM over royalties charged on delivery and aggregator platform fees. We took the position, pursuant to the master license agreement, that delivery fees paid by customers for delivery services and commissions paid to third-party aggregator platforms should not be subject to royalties, which YUM believed to be a material breach of the master license agreement. YUM’s notice also alleged, for the first time, that the Company had engaged in unauthorized use of YUM’s intellectual property under the master license agreement. In December 2022, the parties settled the dispute.

 

If the master license agreement were terminated, or any of our license rights were limited, our business, results of operations and financial condition would be materially adversely affected.

 

We derive substantially all of our revenue from our operations in China and, as a result, our business is highly exposed to the risks of doing business in China.

 

Virtually all of our restaurants are located, and our revenues and profits originate, in China. As a consequence, our financial results are dependent on our results in China, and our business is highly exposed to all of the risks of doing business there. These risks are described further under the section “Risks Related to Doing Business in China.”

 

27

 

2022 Form 10-K


 

Our success is tied to the success of YUM’s brand strength, marketing campaigns and product innovation.

 

The KFC, Pizza Hut and Taco Bell trademarks and related intellectual property are owned by YUM and licensed to us in China, excluding Hong Kong, Macau and Taiwan. The value of these marks depends on the enforcement of YUM’s trademark and intellectual property rights, as well as the strength of YUM’s brands. Due to the nature of licensing and our agreements with YUM, our success is, to a large extent, directly related to the success of the YUM brand strength, including the management, marketing and product innovation success of YUM. Further, if YUM were to reallocate resources away from the KFC, Pizza Hut or Taco Bell brands, these brands and the license rights that have been granted to us could be harmed globally or regionally, which could have a material adverse effect on our results of operations and our competitiveness in China. In addition, strategic decisions made by YUM management related to its brands, marketing and restaurant systems may not be in our best interests and may conflict with our strategic plans.

 

Shortages or interruptions in the availability and delivery of food products and other supplies may increase costs or reduce revenues.

 

The products used in the operation of our restaurants are sourced from a wide variety of suppliers inside and outside of China. We are also dependent upon third parties to make frequent deliveries of food products and other supplies that meet our specifications at competitive prices. Shortages or interruptions in the supply of food products and other supplies to our restaurants could adversely affect the availability, quality and cost of items we use and the operations of our restaurants. Such shortages or disruptions could be caused by inclement weather, natural disasters such as floods, drought and hurricanes, increased demand, labor shortages, problems in production or distribution, restrictions on imports or exports, government levies, political instability in the countries in which suppliers and distributors are located, the financial instability of suppliers and distributors, suppliers’ or distributors’ failure to meet our standards, product quality issues, inflation, other factors relating to the suppliers and distributors and the countries in which they are located, food safety warnings or advisories or the prospect of such pronouncements or other conditions beyond our control. Despite our efforts in developing multiple suppliers for the same items where and when possible, a shortage or interruption in the availability of certain food products or supplies could still increase costs and limit the availability of products critical to restaurant operations, which in turn could lead to restaurant closures and/or a decrease in sales. In addition, failure by a principal supplier or distributor for us and/or our franchisees to meet its service requirements could lead to a disruption of service or supply until a new supplier or distributor is engaged, and any disruption could have an adverse effect on our business.

 

In addition, we centrally purchase the vast majority of food and paper products, then sell and deliver them to most of our restaurants. We believe this central procurement model allows us to maintain quality control and achieve better prices and terms through volume purchases. However, we may not be able to accurately estimate the demand from franchisees and unconsolidated affiliates, which may result in excessive inventory. We may also not be able to timely collect payments from franchisees and unconsolidated affiliates, which could have a material adverse effect on our business, results of operations and financial condition.

 

The prices of raw materials fluctuate, which may adversely impact our profit margin.

 

Our restaurant business depends on reliable sources of large quantities of raw materials such as protein (including poultry, pork, beef and seafood), cheese, oil, flour and vegetables (including potatoes and lettuce). Our raw materials are subject to price volatility caused by any fluctuation in aggregate supply and demand, or other external conditions, such as changes in international trade policies and international barriers to trade, the emergence of a trade war, climate and environmental conditions where weather conditions or natural events or disasters may affect expected harvests of such raw materials, as well as outbreak of viruses and diseases. For example, in 2019, the price of protein, including poultry, increased significantly in China as a result of the African swine flu. We cannot assure you that we will continue to purchase raw materials at reasonable prices, or that our raw materials prices will remain stable in the future. In addition, because we and our franchisees provide competitively priced food, our ability to pass along commodity price increases to our customers is limited. When commodity prices increase, we may not be able to recover the increased costs through higher pricing in our products. If we are unable to manage the cost of our raw materials or to increase the prices of our products, it may have an adverse impact on our future profit margin.

 

28

 

2022 Form 10-K


 

We may not attain our target development goals; aggressive development could cannibalize existing sales; and new restaurants may not be profitable.

 

Our growth strategy depends on our ability to build new restaurants in China. We are accelerating our store network expansion to reach our 20,000 store milestone. The successful development of new units depends in large part on our ability to open new restaurants and to operate these restaurants profitably. We cannot guarantee that we, or our franchisees, will be able to achieve our expansion goals or that new restaurants will be operated profitably. Further, there is no assurance that any new restaurant will produce operating results similar to those of our existing restaurants. Other risks which could impact our ability to increase the number of our restaurants include prevailing economic conditions and our or our franchisees’ ability to obtain suitable restaurant locations, negotiate acceptable lease or purchase terms for the locations, obtain required permits and approvals in a timely manner, hire and train qualified restaurant crews and meet construction schedules.

 

In addition, the new restaurants could impact the sales of our existing restaurants nearby. There can be no assurance that sales cannibalization will not occur or become more significant in the future as we increase our presence in existing markets in China.

 

Our growth strategy includes expanding our ownership and operation of restaurant units through organic growth by developing new restaurants that meet our investment objectives. We may not be able to achieve our growth objectives, and these new restaurants may not be profitable. The opening and success of new restaurants depends on various factors, including:

 

our ability to obtain or self-fund adequate development financing;

 

competition in current and future markets;

 

our degree of penetration in existing markets;

 

the identification and availability of suitable and economically viable locations;

 

sales and margin levels at existing restaurants;

 

the negotiation of acceptable lease or purchase terms for new locations;

 

regulatory compliance regarding restaurant opening and operation;

 

the ability to meet construction schedules;

 

our ability to hire and retain qualified restaurant crews; and

 

general economic and business conditions.

 

We are subject to all of the risks associated with leasing real estate, and any adverse developments could harm our business, results of operations and financial condition.

 

As a significant number of our restaurants are operating on leased properties, we are exposed to retail rental market conditions. As of year-end 2022, we leased over 10,000 properties in China for our Company-owned restaurants. For information regarding our leased properties, please refer to Item 2. “Properties.” Accordingly, we are subject to all of the risks generally associated with leasing real estate, including changes in the investment climate for real estate, demographic trends, trade zone shifts, central business district relocations, and supply or demand for the use of the restaurants, as well as potential liability for environmental contamination.

 

We generally enter into lease agreements with initial terms of 10 to 20 years. Approximately 6% of our existing lease agreements expire before the end of 2023. Most of our lease agreements contain an early termination clause that permits us to terminate the lease agreement early if the restaurant’s unit contribution is negative for a specified period of time. We generally do not have renewal options for our leases and need to negotiate the terms of renewal with the lessor, who may insist on a significant modification to the terms and conditions of the lease agreement.

29

 

2022 Form 10-K


 

 

The rent under the majority of our current restaurant lease agreements is generally payable in one of three ways: (i) fixed rent; (ii) the higher of a fixed base rent or a percentage of the restaurant’s annual sales revenue; or (iii) a percentage of the restaurant’s annual sales revenue. In addition to increases in rent resulting from fluctuations in annual sales revenue, certain of our lease agreements include provisions specifying fixed increases in rental payments over the respective terms of the lease agreements. While these provisions have been negotiated and are specified in the lease agreement, they will increase our costs of operation and therefore may materially and adversely affect our results of operation and financial condition if we are not able to pass on the increased costs to our customers. Certain of our lease agreements also provide for the payment of a management fee at either a fixed rate or fixed amount per square meter of the relevant leased property.

 

Where we do not have an option to renew a lease agreement, we must negotiate the terms of renewal with the lessor, who may insist on a significant modification to the terms and conditions of the lease agreement. If a lease agreement is renewed at a rate substantially higher than the existing rate, or if any existing favorable terms granted by the lessor are not extended, we must determine whether it is desirable to renew on such modified terms. If we are unable to renew leases for our restaurant sites on acceptable terms or at all, we will have to close or relocate the relevant restaurants, which would eliminate the sales that those restaurants would have contributed to our revenues during the period of closure, and could subject us to construction, renovation and other costs and risks. In addition, the revenue and any profit generated after relocation may be less than the revenue and profit previously generated before such relocation. As a result, any inability to obtain leases for desirable restaurant locations or renew existing leases on commercially reasonable terms could have a material adverse effect on our business, results of operations and financial condition.

 

We may not be able to obtain desirable restaurant locations on commercially reasonable terms.

 

We compete with other retailers and restaurants for suitable locations, and the market for retail premises is very competitive in China. Our competitors may negotiate more favorable lease terms than our lease terms, and some landlords and developers may offer priority or grant exclusivity to some of our competitors for desirable locations for various reasons beyond our control. We cannot provide assurance that we will be able to enter into new lease agreements for prime locations on commercially reasonable terms, if at all. If we cannot obtain desirable restaurant locations on commercially reasonable terms, our business, results of operations and ability to implement our growth strategy may be materially and adversely affected.

 

Labor shortages or increases in labor costs could slow our growth and harm our business and results of operations.

 

Restaurant operations are highly service-oriented, and our success depends in part upon our ability to attract, retain and motivate a sufficient number of qualified employees, including restaurant managers, and other crew members. The market for qualified employees in our industry is very competitive. Any future inability to recruit and retain qualified individuals may delay the planned openings of new restaurants and could adversely impact our existing restaurants. Any such delays, material increases in employee turnover rate in existing restaurants or widespread employee dissatisfaction could have a material adverse effect on our business and results of operations. Competition for qualified employees could also compel us to pay higher wages to attract or retain key crew members, which could result in higher labor costs.

 

We may also face challenges relating to temporary shortage of staff, including as a result of events outside our control. For example, due to widespread infections following the relaxation of COVID restrictions in China, we experienced a shortage of restaurant staff in December 2022.

 

The Chinese Labor Contract Law that became effective on January 1, 2008 and amended on December 28, 2012 formalizes workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions, and provides for specific standards and procedures for employees’ protection. Moreover, minimum wage requirements in China have increased and could continue to increase our labor costs in the future. The salary level of employees in the restaurant industry in China has been increasing in the past several years. We may not be able to increase our product prices enough to pass these increased labor costs on to our customers, in which case our business and results of operations would be materially and adversely affected.

 

30

 

2022 Form 10-K


 

In addition, our delivery business requires a large number of riders, which are either contracted with us or the aggregators’ platforms to deliver orders exclusively for KFC or Pizza Hut stores. A shortage of riders could disrupt our delivery business and result in higher rider costs. Furthermore, an increase in the rates charged by the third-party rider companies could also result in higher delivery costs. Recent guidelines issued by regulatory authorities increased protection on rider safety and welfare, and the cost to comply with such requirements could be passed on to us.

 

Our success depends substantially on our corporate reputation and on the value and perception of our brands.

 

One of our primary assets is the exclusive right to use the KFC, Pizza Hut and Taco Bell trademarks in restaurants in China. Our success depends in large part upon our ability and our franchisees’ ability to maintain and enhance the value of these brands and our customers’ loyalty to these brands in China. Brand value is based in part on consumer perceptions on a variety of subjective qualities. Business incidents, whether isolated or recurring, and whether originating from us, our franchisees, competitors, suppliers and distributors or YUM and its other licensees or franchisees, competitors, suppliers and distributors outside China can significantly reduce brand value and consumer trust, particularly if the incidents receive considerable publicity or result in litigation. For example, our brands could be damaged by claims or perceptions about the quality or safety of our products or the quality of our suppliers and distributors, regardless of whether such claims or perceptions are true. Any such incidents (even if resulting from the actions of a competitor) could cause a decline directly or indirectly in consumer confidence in, or the perception of, our brands and/or our products and reduce consumer demand for our products, which would likely result in lower revenues and profits. Additionally, our corporate reputation could suffer from a real or perceived failure of corporate governance or misconduct by a company officer, employee or representative.

 

The occurrence of security breaches and cyber-attacks could negatively impact our business.

 

Technology systems, including our mobile or online platforms, mobile payment and ordering systems, loyalty programs and various other online processes and functions, are critical to our business and operations. For example, as of year-end 2022, KFC had over 380 million loyalty program members and Pizza Hut had over 130 million. Both KFC and Pizza Hut member sales represented approximately 62% of each brand's system sales in 2022. Digital orders accounted for 89% of KFC and Pizza Hut Company sales in 2022. As we continue to expand our digital initiatives, the risks relating to security breaches and cyber-attacks against our systems, both internal and those we have outsourced, may increase.

 

Because of our brand recognition in China, we are consistently subject to attempts to compromise our security and information systems, including denial of service attacks, viruses, malicious software or ransomware, and exploitations of system flaws or weaknesses. Error or malfeasance or other irregularities may also result in the failure of our or our third-party service providers' cybersecurity measures and may give rise to a cyber incident. The techniques used to conduct security breaches and cyber-attacks, as well as the sources and targets of these attacks, change frequently and may not be recognized until launched against us or our third-party service providers. We or our third-party service providers may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. We have in the past and are likely again in the future to be subject to these types of attacks, although to date no attack has resulted in any material damages or remediation costs. The primary risks that could directly result from the occurrence of a cyber incident include operational interruption, misappropriation of company information or private data, deletion or modification of user information, damage to our relationships with customers, franchisees and employees, and damage to our reputation. If we or our third-party service providers are unable to avert security breaches and cyber-attacks, we could incur significantly higher costs, including remediation costs to repair damage caused by the breach (including business incentives to make amends with affected customers and franchisees), costs to deploy additional personnel and network protection technologies, train employees and engage third-party experts and consultants, as well as litigation costs resulting from the incident. These costs, which could be material, could adversely impact our results of operations in the period in which they are incurred and may not meaningfully limit the success of future attempts to breach our information technology systems.

 

31

 

2022 Form 10-K


 

Unauthorized access to, or improper use, disclosure, theft or destruction of, our customer or employee personal, financial or other data or our proprietary or confidential information that is stored in our information systems or by third parties on our behalf could result in substantial costs, expose us to litigation and damage our reputation.

 

We have been using, and plan to continue to use, digital technologies to improve the customer experience and drive sales growth. We, directly or indirectly, receive and maintain certain personal, financial and other information about our customers in various information systems that we maintain and in those maintained by third-party service providers when, for example, receiving orders through mobile or online platforms, accepting digital payments, operating loyalty programs and conducting digital marketing programs. Our information technology systems, such as those we use for administrative functions, including human resources, payroll, accounting and internal and external communications, can contain personal, financial or other information of our over 400,000 employees. We also maintain important proprietary and other confidential information related to our operations and identifiable information about our franchisees. As a result, we face risks inherent in handling and protecting large volumes of information.

 

If our security and information systems or the security and information systems of third-party service providers are compromised for any reason, including as a result of data corruption or loss, security breach, cyber-attack or other external or internal methods, or if our employees, franchisees or service providers fail to comply with laws, regulations and practice standards, and this information is obtained by unauthorized persons, used or disclosed inappropriately or destroyed, it could subject us to litigation and government enforcement actions, cause us to incur substantial costs, liabilities and penalties and/or result in a loss of customer confidence, any and all of which could adversely affect our business, reputation, ability to attract new customers, results of operations and financial condition.

 

In addition, the use and handling of this information is regulated by evolving and increasingly demanding laws and regulations. The Chinese government has focused increasingly on regulation in the areas of information security and protection, including by implementing the PRC Cybersecurity Law effective June 1, 2017, which imposes tightened requirements on data privacy and cybersecurity practices. There are uncertainties with respect to the application of the cybersecurity law in certain circumstances. In addition, the PRC Data Security Law, which took effect on September 1, 2021, imposes data security and privacy obligations on entities and individuals carrying out data activities (including activities outside of the PRC), requires a national security review of data activities that may affect national security, and imposes restrictions on data transmissions. Furthermore, the PRC Personal Information Protection Law, which took effect on November 1, 2021, sets out the regulatory framework for handling and protection of personal information and transmission of personal information, and many specific requirements of the law remain to be clarified by the CAC and other regulatory authorities. The Revised Cybersecurity Review Measures, which took effect on February 15, 2022, require critical information infrastructure operators procuring network products and services and online platform operators carrying out data processing activities, which affect or may affect national security, to conduct a cybersecurity review pursuant to the provisions therein. The Measures for Security Assessment for Outbound Data Transfer, which took effect on September 1, 2022, mandate mandatory government security review by the CAC in advance of certain cross-border data transfer activities. We have established a professional team to formulate and implement internal data security policies to comply with the regulations and policies issued by the CAC, monitor our compliance practices and assess any non-compliance issues. We believe that we are compliant in all material respects with the applicable regulations and policies that have been issued by the CAC to date. As of the date of this Form 10-K, (i) we have not received any formal notice from any PRC cybersecurity regulator identifying us as a “critical information infrastructure operator” or requiring us to go through the cybersecurity review procedures pursuant to the Revised Cybersecurity Review Measures; and (ii) we are not aware of any investigations against us initiated by the CAC based on the Revised Cybersecurity Review Measures. The exact scope of “critical information infrastructure operators” under the current regulatory regime remains unclear, and the PRC government authorities may have wide discretion in the interpretation and enforcement of the applicable laws. Therefore, it is uncertain whether, in the future, we would be deemed to be a critical information infrastructure operator under PRC law. If we are deemed to be a critical information infrastructure operator under the PRC cybersecurity laws and regulations, we may be subject to obligations in addition to what we have fulfilled under the PRC cybersecurity laws and regulations.

 

Interpretation, application and enforcement of these laws, rules and regulations evolve from time to time and their scope may continually change, through new legislation, amendments to existing legislation or changes in enforcement. We have been taking and will continue to take reasonable measures to comply with applicable cybersecurity, data privacy and security laws. We cannot guarantee the effectiveness of the measures undertaken by us, and such measures may still be determined as insufficient, improper, or even as user-privacy invasive, by the relevant authorities, which may result in penalties against us.

 

32

 

2022 Form 10-K


 

Compliance with these laws, as well as additional regulations and standards regarding data privacy, data collection and information security that PRC regulatory bodies may enact in the future, may result in additional expenses to us as we may be required to upgrade our current information technology systems. Furthermore, as a result of legislative and regulatory rules, we may be required to notify the owners of information of any breach, theft or loss of their information, which could harm our reputation, as well as subject us to litigation or actions by regulatory bodies and adversely affect our financial results.

 

We expect that cybersecurity, data privacy and security will continue to be a focus of regulators, as well as attract continued or greater public scrutiny and attention going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with information security and protection. If we are unable to manage these risks, we could become subject to penalties, including fines, suspension of business, shutdown of websites and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected.

 

Our operations are highly dependent upon our information technology systems and any failures or interruptions of service or security breaches in our systems may interrupt our operations and harm our business.

 

Our operations are dependent upon the successful and uninterrupted functioning of our computer and information technology systems. We rely heavily on information technology systems across our operations, including those we use for finance and accounting functions, supply chain management, point-of-sale processing, online and mobile platforms, mobile payment processing, loyalty programs and various other processes and functions, and many of these systems are interdependent on one another for their functionality. Additionally, the success of several of our initiatives to drive growth, including our priority to expand digital engagement with our customers, is highly dependent on the reliability, availability, integrity, scalability and capacity of our information technology systems. We also rely on third-party providers and platforms for some of these information technology systems and support.

 

Our operational safeguards may not be effective in preventing the failure of these systems to operate effectively and be continuously available to run our business. Such failures may be caused by various factors, including fire, natural disaster, power loss, telecommunications failure, problems with transitioning to upgraded or replacement systems, physical break-ins, programming errors, flaws in third-party software or services, disruptions or service failures of technology infrastructure facilities, such as storage servers, provided by third parties, errors or malfeasance by our employees or third-party service providers or breaches in the security of these systems or platforms, including unauthorized entry and computer viruses. We cannot assure you that we will resolve these system failures and restore our systems and operations in an effective and timely manner. Such system failures and any delayed restore process could result in:

additional computer and information security and systems development costs;
diversion of technical and other resources;
loss of customers and sales;
loss or theft of customer, employee or other data;
negative publicity;
harm to our business and reputation;
negative impact on the availability and the efficiency of our restaurant operations; and
exposure to litigation claims, government investigations and enforcement actions, fraud losses or other liabilities.

 

We will continue to upgrade and improve our information technology systems to support our business growth. However, we cannot assure you that we will be successful in executing these system upgrades and improvement strategies and the foregoing risks could intensify while we execute those upgrades and improvements. In particular, our systems may experience interruptions during upgrades, and the new technologies or infrastructures may not be fully integrated with the existing systems on a timely basis, or at all. If we are unsuccessful in upgrading and improving our systems, our ability to increase comparable store sales, improve operations, implement cost controls and grow our business may be constrained.

 

33

 

2022 Form 10-K


 

Our business depends on the performance of, and our long-term relationships with, third-party mobile payment processors, internet infrastructure operators, internet service providers and delivery aggregators.

 

Digital payments, including mobile payments, accounted for approximately 99% of Yum China Company sales in 2022. The ability to accept mobile payments is critical to our business. We accept payments through third-party mobile payment processors, such as WeChat Pay, Alipay and Union Pay. We also developed and launched YUMC Pay in the first quarter of 2019, in partnership with Union Pay, which offers a convenient payment option for users within a single App. If we fail to extend or renew the agreements with these mobile payment processors on acceptable terms, if these mobile payment processors are unwilling or unable to provide us with payment processing service or impose onerous requirements on us in order to access their services, or if they increase the fees they charge us for these services, our business and results of operations could be harmed.

 

Our business depends on the performance and reliability of the internet infrastructure in China. Almost all access to the internet in China is maintained through state-owned telecommunications operators under administrative control, and we obtain access to end-user networks operated by such telecommunications operators and internet service providers to give customers access to our websites. The satisfactory performance, availability and reliability of our websites, online platforms and Apps depends on telecommunications operators and other third-party providers for communications and storage capacity, including bandwidth and server storage, among other things. If we are unable to enter into and renew agreements with these providers on acceptable terms, if any of our existing agreements with such providers are terminated as a result of our breach or otherwise, or if these providers experience problems with the functionality and effectiveness of their systems or platforms, our ability to provide our services to our customers could be adversely affected. The failure of telecommunications operators to provide us with the requisite bandwidth could also interfere with the speed and availability of our websites and Apps. Frequent interruptions could frustrate customers and discourage them from attempting to place orders, which could cause us to lose customers and harm our operating results.

 

Furthermore, to the extent we rely on the systems of third parties in areas such as mobile payment processing, online and mobile delivery ordering, telecommunications and wireless networks, any defects, failures and interruptions in their systems could result in similar adverse effects on our business. Sustained or repeated system defects, failures or interruptions could materially impact our operations and results of operations.

 

Additionally, we have no control over the costs of the services provided by the telecommunications operators. If the prices that we pay for telecommunications and internet services rise significantly, our profit margins could be adversely affected. In addition, if internet access fees or other charges to internet users increase, our user traffic may decrease, which in turn may significantly decrease our revenues.

 

Our delivery business depends on the performance of, and our long-term relationships with, third-party delivery aggregators. We allow our products to be listed on and ordered through their mobile or online platforms. If we fail to extend or renew the agreements with these aggregators on acceptable terms, or at all, our business and results of operations may be materially and adversely affected. In addition, any increase in the commission rate charged by the aggregators could negatively impact our operating results.

 

Our restaurants offer delivery services. Any failure to provide timely and reliable delivery services by us may materially and adversely affect our business and reputation.

 

As of year-end 2022, approximately 90% of KFC restaurants and over 95% of Pizza Hut restaurants offer delivery services. Delivery contributed to approximately 39% of KFC and Pizza Hut Company sales for 2022. Customers may order delivery service through KFC and Pizza Hut’s websites and Apps. KFC and Pizza Hut have also partnered with third-party delivery aggregators, allowing our products to be listed on and ordered through their mobile or online platforms.

 

Interruptions or failures in our delivery services could prevent the timely or successful delivery of our products. These interruptions may be due to unforeseen events that are beyond our control or the control of third-party aggregators and outsourced riders, such as inclement weather, natural disasters, transportation disruptions or labor unrest. The occurrence of food safety or product quality issues may also result in interruptions or failures in our delivery service. If our products are not delivered on time and in proper condition, customers may refuse to accept our products and have less confidence in our services, in which case our business and reputation may be adversely affected.

 

34

 

2022 Form 10-K


 

Our growth strategy with respect to Lavazza may not be successful.

 

We are committed to making coffee a meaningful part of our business. As part of our strategy to tap into the growing China coffee market, we developed COFFii & JOY as our standalone specialty coffee concept starting in 2018. As of year-end 2021, we had 36 COFFii & JOY coffee stores in eight cities in China. The Company decided to wind down the operations of COFFii & JOY and closed all stores in 2022.

 

In April 2020, we established a joint venture with Lavazza Group to explore and develop the Lavazza coffee concept in China. In September 2021, the Company and Lavazza Group entered into agreements to accelerate the expansion of Lavazza coffee shops to offer a premium and authentic Italian coffee experience in China. As of December 31, 2022, there were 85 Lavazza stores in China. We are targeting to open 1,000 Lavazza stores in the next few years, which may require significant capital and management attention.

 

The success of Lavazza depends in large part on our ability to secure optimal locations, introduce new and unique store formats, and operate these stores profitably. The effectiveness of our supply chain management to assure reliable coffee supply at competitive prices is one of the key factors to the success of Lavazza.

 

There is no assurance that our growth strategy with respect to Lavazza will be successful or generate expected returns in the near term or at all. If we fail to execute this growth strategy successfully, our business, results of operations and financial condition may be materially and adversely affected.

 

The anticipated benefits of our acquisitions may not be realized in a timely manner or at all.

 

In May 2017, we acquired a controlling interest in Daojia with the expectation that the acquisition will further enhance our digital and delivery capabilities, and accelerate growth by building know-how and expertise in the expanding delivery market. In 2018 and 2019, due to declining sales as a result of intensified competition among delivery aggregators, we recorded impairment charges of $23 million and wrote down the Daojia reporting unit goodwill and intangible assets to zero. In April 2020, we completed the acquisition of a 93.3% interest in Huang Ji Huang, a leading Chinese-style casual dining franchise business, for cash consideration of $185 million. With this acquisition, we aim to gain a stronger foothold and enhanced know-how in the Chinese dining space and create synergies. Achieving those anticipated benefits is subject to a number of uncertainties. The operation of the acquired businesses could also involve further unanticipated costs and divert management’s attention away from day-to-day business concerns. We cannot assure you that we will be able to achieve the anticipated benefits of any business acquisitions. Additional information about the Company’s goodwill and intangible assets acquired from our acquisitions is included in Note 9 to the Consolidated Financial Statements in Part II, Item 8. We evaluate indefinite-lived intangible assets and goodwill for impairment on an annual basis or more often if an event occurs or circumstances change that indicates impairment might exist.

 

Our new retail and e-commerce businesses may expose us to new challenges and risks and may adversely affect our business, results of operations and financial condition.

 

We operate a mobile e-commerce platform, V-Gold Mall, to sell products, including electronics, home and kitchen accessories and other general merchandise directly to customers. As part of our strategy to drive growth from off-premise occasions, we also launched packaged foods such as fried rice, steak and pasta, to capture at-home consumption demand. We expect to continue to develop our new retail and e-commerce businesses.

 

35

 

2022 Form 10-K


 

Our new retail and e-commerce businesses expose us to new challenges and risks associated with, for example, anticipating customer demand and preferences, managing inventory and handling more complex supply, product return and delivery service issues. We are relatively new to these businesses and our lack of experience may make it more difficult for us to keep pace with evolving customer demands and preferences. We may misjudge customer demand, resulting in inventory buildup and possible inventory write-downs and write-offs. We may also experience higher return rates on these products, receive more customer complaints about them and face costly product liability claims as a result of selling them, which would harm our brands and reputation as well as our financial performance. In addition, we will have to invest in, maintain and upgrade the necessary network infrastructure, system infrastructure and security to manage and process customer orders, and failures to process orders timely and accurately may also result in complaints and expose us to liability. Furthermore, we rely on third-party delivery companies to deliver the e-commerce products and a portion of the new retail products. Risks related to delivery services are described in further detail above under “—Our restaurants offer delivery services. Any failure to provide timely and reliable delivery services by us may materially and adversely affect our business and reputation.” If we do not successfully address new challenges specific to the new retail and e-commerce businesses and compete effectively, our business, results of operations and financial condition may be materially and adversely affected.

 

Our inability or failure to recognize, respond to and effectively manage the impact of social media could materially adversely impact our business and results of operations.

 

As a customer-facing industry, the Company is heavily reliant on its brand, the perception of which may be significantly impacted by social media. In recent years, there has been a marked increase in the use of social media platforms, including weblogs (blogs), mini-blogs, WeChat and other chat platforms, social media websites, and other forms of internet-based communications, which allow individual access to a broad audience of consumers and other interested persons. Many social media platforms immediately publish the content their subscribers and participants’ post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to our interests and/or may be inaccurate. The online dissemination of negative comments about our brands and business, including inaccurate or irresponsible information, could harm our business, reputation, prospects, results of operations and financial condition. The damage may be immediate and intense, without affording us an opportunity for redress or correction, and we may not be able to recover from any negative publicity in a timely manner or at all. If we fail to recognize, respond to and effectively manage the accelerated impact of social media, our reputation, business and results of operation could be materially and adversely affected.

 

Other risks associated with the use of social media include improper disclosure of proprietary information, exposure of personally identifiable information, fraud, hoaxes or malicious exposure of false information. The inappropriate use of social media by our customers or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation and adversely affect our results of operations.

 

Failure to comply with anti-bribery or anti-corruption laws could adversely affect our business and results of operations.

 

The U.S. Foreign Corrupt Practices Act and similar Chinese laws and other similar applicable laws prohibiting bribery of government officials and other corrupt practices are the subject of increasing emphasis and enforcement around the world. Although we continue to implement policies and procedures designed to duly comply with these laws, there can be no assurance that our employees, contractors, agents or other third parties will not take actions in violation of our policies or applicable law, particularly as we expand our operations through organic growth and acquisitions. Any such violations or suspected violations could subject us to civil or criminal penalties, including substantial fines and significant investigation costs, and could also materially damage our brands, as well as our reputation and prospects, business and results of operations. Publicity relating to any noncompliance or alleged noncompliance could also harm our reputation and adversely affect our business and results of operations.

 

36

 

2022 Form 10-K


 

As a U.S. company with operations concentrated in China, we are subject to both U.S. federal income tax and Chinese enterprise income tax, which could result in relatively higher taxes compared to companies operating primarily in the U.S.

 

Yum China is a Delaware corporation that indirectly owns the subsidiaries that conduct our business in China and is subject to both U.S. federal income tax and Chinese enterprise income tax. While U.S. tax law generally exempts all of the foreign-source dividends paid to the U.S. parent company, with operations primarily in China, we continue to be subject to the Chinese enterprise income tax at a rate of 25% generally and an additional 10% withholding tax on any earnings repatriated outside of China levied by the Chinese tax authorities, subject to any reduction or exemption set forth in relevant tax treaties or tax arrangements. This may put Yum China at a relative disadvantage compared to companies operating primarily in the U.S., which are currently subject to a U.S. corporate income tax rate of 21%.

 

In addition, U.S. tax law provides anti-deferral, anti-base erosion and other provisions that may subject the U.S. parent company to additional U.S. taxes under certain circumstances. We are assessed with tax on GILTI earned by certain foreign subsidiaries, and it causes our effective tax rate to increase and affect the amount of any distributions available to our stockholders.

 

Tax matters, including changes in tax rates, disagreements with tax authorities and imposition of new taxes could impact our results of operations and financial condition.

 

We are subject to income taxes as well as non-income based taxes, such as VAT, customs duty, property tax, stamp duty, environmental protection tax, withholding taxes and obligations and local surcharges, in China and income tax and other taxes in the U.S. and other jurisdictions. We are also subject to reviews, examinations and audits by Chinese tax authorities, the IRS and other tax authorities with respect to income and non-income based taxes, including transfer pricing. Our operations in respective jurisdictions generally remain subject to examination for tax years as far back as 2006, some of which years are currently under audit by local tax authorities. If Chinese tax authorities, the IRS or other tax authorities disagree with our tax positions, we could face additional tax liabilities, including interest and penalties. Payment of such additional amounts upon final settlement or adjudication of any disputes could have a material adverse impact on our results of operations and financial condition.

 

In addition, we are directly and indirectly affected by new tax legislation and regulation and the interpretation of tax laws and regulations worldwide. For example, in 2017, the U.S. Tax Act implemented broad reforms to the U.S. corporate income tax system and significantly altered how U.S. multinational corporations are taxed on foreign earnings. In addition, on August 16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed into law in the U.S. The IRA contains certain tax measures, including a corporate alternative minimum tax on certain large corporations and an excise tax on net share repurchases. The details of the computation of these taxes will be subject to regulations to be issued by the U.S. Department of the Treasury. Any increases in tax rates or changes in tax laws or the interpretations thereof could have a material adverse impact on our results of operations and financial condition.

 

Moreover, the tax regime in China is rapidly evolving and there can be significant uncertainty for taxpayers in China as Chinese tax laws may change significantly or be subject to uncertain interpretations. Effective May 1, 2016, VAT reform has been rolled out to cover all business sectors nationwide to completely replace the BT that has historically been applied to certain industries. The interpretation and application of the new VAT regime are not settled at some local governmental levels. In addition, China is in the process of enacting the prevailing VAT regulations into VAT law. However, the timetable for enacting the VAT law is not clear. Changes in legislation, regulation or interpretation of existing laws and regulations in the U.S., China, and other jurisdictions where we are subject to taxation could increase our taxes and have an adverse effect on our results of operations and financial condition.

 

Our results of operations may be adversely impacted by changes in consumer discretionary spending and general economic conditions.

 

Purchases at our restaurants are discretionary for consumers and, therefore, our results of operations are susceptible to economic slowdowns and recessions. Our results of operations are dependent upon discretionary spending by consumers, which may be affected by general economic conditions in China. Some of the factors that impact discretionary consumer spending include unemployment rates, fluctuations in the level of disposable income, the price of gasoline, stock market performance and changes in the level of consumer confidence. These and other macroeconomic factors could have an adverse effect on our sales, profitability or development plans, which could harm our results of operations and financial condition.

 

37

 

2022 Form 10-K


 

The restaurant industry in which we operate is highly competitive.

 

The restaurant industry in which we operate is highly competitive with respect to price and quality of food products, new product development, advertising levels and promotional initiatives, customer service, reputation, restaurant location, and attractiveness and maintenance of properties. We cannot assure you that we will continue to develop new products and maintain an attractive menu to suit changing customer tastes, nutritional trends, dine-in or at-home consumption patterns and general customer demands in China. Our failure to anticipate, identify, interpret and react to these changes could lead to reduced guest traffic and demand for our restaurants. Even if we do correctly anticipate, identify, interpret and react to these changes, there can be no assurance that our restaurants are able to compete successfully with other restaurant outlets in new and existing markets. As a result, our business could be adversely affected. We also face growing competition as a result of convergence in grocery, convenience, deli and restaurant services, including the offering by the grocery industry of convenient meals, including pizzas and entrees with side dishes. Competition from food delivery aggregators, other food delivery services and shared kitchens in China has also increased in recent years, all of which offer a wide variety of cuisine types across different brands, particularly in urbanized areas. Increased competition could have an adverse effect on our sales, profitability or development plans, which could harm our results of operations and financial condition.

 

In addition, increased awareness about nutrition and healthy lifestyles may cause consumers to demand more healthy foods. If we are unable to respond to such changes in consumer taste and preferences in a timely manner or at all, or if our competitors are able to address these concerns more effectively, our business, financial condition and results of operations may be materially and adversely affected.

 

Any inability to successfully compete with the other restaurants, food delivery aggregators, other food delivery services and shared kitchens in our markets may prevent us from increasing or sustaining our revenues and profitability and could have a material adverse effect on our business, results of operations, financial condition and/or cash flows. We may also need to modify or refine elements of our restaurant system in order to compete with popular new restaurant styles or concepts, including delivery aggregators, that develop from time to time. There can be no assurance that we will be successful in implementing any such modifications or that such modifications will not reduce our profitability.

 

We require various approvals, licenses and permits to operate our business and the loss of or failure to obtain or renew any or all of these approvals, licenses and permits could adversely affect our business and results of operations.

 

In accordance with the laws and regulations of China, we are required to maintain various approvals, licenses, permits, registrations and filings in order to operate our restaurant business. Each of our restaurants in China is required to obtain (1) the relevant food business license; (2) the environmental protection assessment and inspection registration or approval; and (3) the fire safety inspection acceptance approval or other alternatives. Some of our restaurants which sell alcoholic beverages are required to make further registrations or obtain additional approvals. These licenses and registrations are achieved upon satisfactory compliance with, among other things, the applicable food safety, hygiene, environmental protection, fire safety and alcohol laws and regulations. Most of these licenses are subject to periodic examinations or verifications by relevant authorities and are valid only for a fixed period of time and subject to renewal and accreditation.

 

We did not obtain these licenses or approvals for a limited number of our restaurants in a timely manner in the past and there is no assurance that we or our franchisees will be able to obtain or maintain any of these licenses in the future. Rapidly evolving laws and regulations, and inconsistent interpretations and enforcements thereof could impede our ability to obtain or maintain the required permits, licenses and certificates required to conduct our businesses in China. Difficulties or failure in obtaining the required permits, licenses and certificates could result in our inability to continue our business in China in a manner consistent with past practice. In such an event, our business and results of operations may be adversely affected. If (i) we have inadvertently concluded that such permissions, approvals, licenses or permits have been acquired or are not required, or (ii) applicable laws, regulations, or interpretations change and we are required to obtain such permissions, approvals, licenses or permits in the future, then we may have to expend time and costs to procure them. If we are unable to do so on commercially reasonable terms or in a timely manner, it could cause significant disruption to our business operations and damage our reputation, which would in turn have a material adverse effect on our business, results of operations and financial condition.

 

38

 

2022 Form 10-K


 

We may not be able to adequately protect the intellectual property we own or have the right to use, which could harm the value of our brands and adversely affect our business and operations.

 

We believe that our brands are essential to our success and our competitive position. The fact that our trademarks are duly registered may not be adequate to protect these intellectual property rights. In addition, third parties may infringe upon the intellectual property rights we own or have the right to use or misappropriate the proprietary knowledge we use in our business, primarily our proprietary recipes, which could have a material adverse effect on our business, results of operations or financial condition. The laws of China may not offer the same protection for intellectual property rights as the U.S. and other jurisdictions with more robust intellectual property laws.

 

We are required under the master license agreement with YUM to police, protect and enforce the trademarks and other intellectual property rights used by us, and to protect trade secrets. Such actions to police, protect or enforce could result in substantial costs and diversion of resources, which could negatively affect our sales, profitability and prospects. Furthermore, the application of laws governing intellectual property rights in China is uncertain and evolving, and could involve substantial risks to us. Even if actions to police, protect or enforce are resolved in our favor, we may not be able to successfully enforce the judgment and remedies awarded by the court and such remedies may not be adequate to compensate us for our actual or anticipated losses.

 

In addition, we may face claims of infringement that could interfere with the use of the proprietary know-how, concepts, recipes or trade secrets we use in our business. Defending against such claims may be costly and, if we are unsuccessful, we may be prohibited from continuing to use such proprietary information in the future or be forced to pay damages, royalties or other fees for using such proprietary information, any of which could negatively affect our sales, profitability and prospects.

 

Our licensor may not be able to adequately protect its intellectual property, which could harm the value of the KFC, Pizza Hut and Taco Bell brands and branded products and adversely affect our business, results of operations and financial condition.

 

The success of our business depends in large part on our continued ability to use the trademarks, service marks, recipes and other components of the KFC, Pizza Hut and Taco Bell branded systems that we license from YUM pursuant to the master license agreement we entered into in connection with the separation.

 

We are not aware of any assertions that the trademarks, menu offerings or other intellectual property rights we license from YUM infringe upon the proprietary rights of third parties, but third parties may claim infringement by us or YUM in the future. Any such claim, whether or not it has merit, could be time consuming, result in costly litigation, cause delays in introducing new menu items in the future or require us to enter into additional royalty or licensing agreements with third parties. As a result, any such claims could have a material adverse effect on our business, results of operations and financial condition.

 

Our results of operations may fluctuate due to seasonality and certain major events in China.

 

Our sales are subject to seasonality. For example, we typically generate higher sales during Chinese festivities, holiday seasons as well as summer months, but relatively lower sales and lower operating profit during the second and fourth quarters. As a result of these fluctuations, softer sales during a period in which we have historically experienced higher sales (such as the disruption in operations from the COVID-19 outbreak) would have a disproportionately negative effect on our full-year results, and comparisons of sales and results of operations within a financial year may not be able to be relied on as indicators of our future performance. Any seasonal fluctuations reported in the future may differ from the expectations of our investors.

 

We may be unable to detect, deter and prevent all instances of fraud or other misconduct committed by our employees, customers or other third parties.

 

As we operate in the restaurant industry, we usually receive and handle relatively large amounts of cash in our daily operations. Instances of fraud, theft or other misconduct with respect to cash can be difficult to detect, deter and prevent, and could subject us to financial losses and harm our reputation.

 

We may be unable to prevent, detect or deter all such instances of misconduct. Any such misconduct committed against our interests, which may include past acts that have gone undetected or future acts, may have a material adverse effect on our business and results of operations.

39

 

2022 Form 10-K


 

 

Our success depends on the continuing efforts of our key management and experienced and capable personnel as well as our ability to recruit new talent.

 

Our future success is significantly dependent upon the continued service of our key management as well as experienced and capable personnel generally. If we lose the services of any member of key management, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new staff, which could severely disrupt our business and growth. If any of our key management joins a competitor or forms a competing business, we may lose customers, know-how and key professionals and staff members. Our rapid growth also requires us to hire, train, and retain a wide range of talent who can adapt to a dynamic, competitive and challenging business environment and are capable of helping us conduct effective marketing and management. We will need to continue to attract, train and retain talent at all levels as we expand our business and operations. We may need to offer attractive compensation and other benefits packages, including share-based compensation, to attract and retain them. We also need to provide our employees with sufficient training to help them to realize their career development and grow with us. Any failure to attract, train, retain or motivate key management and experienced and capable personnel could severely disrupt our business and growth.

 

From time to time we may evaluate and potentially consummate strategic investments or acquisitions, which may be unsuccessful and adversely affect our operation and financial results.

 

To complement our business and strengthen our market-leading position, we may form strategic alliances or make strategic investments and acquisitions from time to time. Some of the risks and uncertainties that could cause actual results to differ materially include, but are not limited to, the fact that the integration of the target company may require significant time, attention and resources, potentially diverting management’s attention from the conduct of our business, and the expected synergies from the acquisition may not be realized. We may experience difficulties in integrating our operations with new investments or acquired businesses, implementing our strategies or achieving expected levels of net revenues, profitability, productivity or other benefits. Therefore, we cannot assure you that our investments or acquisitions will benefit our business strategy, generate sufficient net revenues to offset the associated investment or acquisition costs, or otherwise result in the intended benefits.

 

Our investment in technology and innovation may not generate the expected level of returns.

 

We have invested and intend to continue to invest significantly in technology systems and innovation to enhance digitalization and the guest experience and improve the efficiency of our operations. We cannot assure you that our investments in technology and innovation will generate sufficient returns or have the expected effects on our business operations, if at all. If our technology and innovation investments do not meet expectations for the above or other reasons, our prospects and share price may be materially and adversely affected.

 

Fair value changes for our investment in equity securities and lower yields of our short-term investments may adversely affect our financial condition and results of operations.

 

We may invest in equity securities and short-term investments, such as time deposits, from time to time. In September 2018, we invested in the equity securities of Meituan Dianping, the fair value of which is determined based on the closing market price for the shares at the end of each reporting period, with subsequent fair value changes recorded in our consolidated statements of income. We recorded a pre-tax loss $27 million and $38 million for 2022 and 2021, and related pre-tax gains of $104 million for 2020, respectively. Our short-term investments as of December 31, 2022 and 2021 amounted to $2,022 million and $2,860 million, respectively. We cannot guarantee that our investment in equity securities will not experience fair value losses, which may adversely affect our period-to-period earnings, financial condition and results of operations. In addition, our short-term investments may earn yields lower than anticipated, and any failure to realize the benefits we expected from these investments may adversely affect our financial results.

 

40

 

2022 Form 10-K


 

Our operating results may be adversely affected by our investment in unconsolidated affiliates.

 

We apply the equity method to account for the investments in unconsolidated affiliates over which we have significant influence but do not control. Our share of the earnings or losses and share of changes in other comprehensive income or losses of these unconsolidated affiliates are included in net income in our consolidated statements of income and other comprehensive income or losses, respectively. Even if there is no cash flow from unconsolidated affiliates until dividends are received, the performance of unconsolidated affiliates may affect our results of operations through our equity method accounting. In addition, we evaluate our investments in unconsolidated affiliates for impairment whenever events or circumstances indicate that a decrease in the fair value of an investment has occurred which is other than temporary. In addition, when we acquire additional equity interest in the unconsolidated affiliates to obtain control, it may result in gain or loss from re-measurement of our previously held equity interest and thus have a significant impact on our operating results. As a result of the acquisition of Hangzhou KFC, a former unconsolidated affiliate, in the fourth quarter of 2021, we recognized a gain of $618 million from the re-measurement of our previously held 47% equity interest at fair value.

 

Risks Related to Doing Business in China

 

Changes in Chinese political policies and economic and social policies or conditions may materially and adversely affect our business, results of operations and financial condition and may result in our inability to sustain our growth and expansion strategies.

 

Substantially all of our long-lived assets and business operations are located in China. Accordingly, our business, results of operations, financial condition and prospects may be influenced to a significant degree by political, economic and social conditions in China generally, by continued economic growth in China as a whole, and by geopolitical stability in the region. For example, our results of operations in the third quarter of 2016 were adversely impacted by an international court ruling in July 2016 regarding claims to sovereignty over the South China Sea, which triggered a series of regional protests and boycotts in China, intensified by social media, against a few international companies with well-known western brands.

 

The Chinese economy, markets and levels of consumer spending are influenced by many factors beyond our control, including current and future economic conditions, political uncertainty, unemployment rates, inflation, fluctuations in the level of disposable income, taxation, foreign exchange control, and changes in interest and currency exchange rates. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, foreign exchange control and fiscal measures and allocation of resources. Although the Chinese government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the restructuring of state assets and state-owned enterprises, and the establishment of improved corporate governance in business enterprises, a significant portion of productive assets in China is still owned or controlled by the Chinese government. The Chinese government also exercises significant control or influence over Chinese economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary and fiscal policies, regulating financial services and institutions and providing preferential treatment to particular industries or companies.

 

While the Chinese economy has experienced significant growth in recent decades, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy but may also have a negative effect on us. Our results of operations and financial condition could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, the Chinese government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China. Since 2012, Chinese economic growth has slowed and any prolonged slowdown in the Chinese economy may reduce the demand for our products and adversely affect our business, results of operations and financial condition. Restaurant dining, and specifically casual dining, is discretionary for customers and tends to be higher during periods in which favorable economic conditions prevail. Customers’ tendency to become more cost-conscious as a result of an economic slowdown or decreases in disposable income may reduce our customer traffic or average revenue per customer, which may adversely affect our revenues.

 

41

 

2022 Form 10-K


 

Uncertainties with respect to the interpretation and enforcement of Chinese laws, rules and regulations could have a material adverse effect on us.

 

Substantially all of our operations are conducted in China, and are governed by Chinese laws, rules and regulations. Our subsidiaries are subject to laws, rules and regulations applicable to foreign investment in China. The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which legal cases may be cited for reference but have limited value as precedents. In the late 1970s, the Chinese government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past four decades has significantly increased the protections afforded to various forms of foreign or private-sector investment in China. However, since these laws and regulations are relatively new and the Chinese legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties.

 

From time to time, we may have to resort to administrative and court proceedings to interpret and/or enforce our legal rights. However, since Chinese administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings, and the level of legal protection we enjoy, than in more developed legal systems. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Furthermore, the Chinese legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect.

 

As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, and any failure to respond to changes in the regulatory environment in China could materially and adversely affect our business and impede our ability to continue our operations.

 

The audit report included in this Form 10-K is prepared by auditors who are located in China, and in the event the PCAOB is unable to inspect our auditors, our common stock will be subject to potential delisting from the New York Stock Exchange.

 

As an auditor of companies that are publicly traded in the United States and a firm registered with the PCAOB, our independent registered public accounting firm is required under the laws of the United States to undergo regular inspections by the PCAOB. However, because substantially all of our operations are conducted within China, our independent registered public accounting firm’s audit documentation related to their audit report included in this Form 10-K is located in China. Prior to 2022, the PCAOB was unable to conduct full inspections in China or review audit documentation located within China without the approval of Chinese authorities, which was not granted. Accordingly, prior to 2022, the PCAOB had not inspected our independent registered public accounting firm or reviewed documentation related to the audit of our financial statements.

 

Inspections of other auditors conducted by the PCAOB outside of China have at times identified deficiencies in those auditors’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The previous lack of PCAOB inspections of audit work undertaken in China prevented the PCAOB from evaluating our auditor’s audits and its quality control procedures. Without the benefit of PCAOB inspections, stockholders may lose confidence in our reported financial information and procedures and the quality of our financial statements.

 

On December 18, 2020, the HFCAA was signed into law. The HFCAA requires the SEC to prohibit the securities of any “covered issuer,” including the Company, from being traded on any of the U.S. securities exchanges, including the New York Stock Exchange, or traded “over-the-counter,” if the auditor of the covered issuer’s financial statements is not subject to PCAOB inspection for three consecutive years, beginning in 2021. On December 2, 2021, the SEC adopted final rules implementing the HFCAA, pursuant to which the SEC will identify companies subject to the HFCAA, known as “Commission-Identified Issuers,” as early as possible after the filing of their next annual report, and implement the trading prohibition as soon as practicable after they have been conclusively identified as Commission-Identified Issuers for three consecutive years. The Consolidated Appropriations Act, 2023 reduced the number of consecutive non-inspection years required to trigger the trading prohibition under the HFCAA from three years to two.

 

42

 

2022 Form 10-K


 

On December 16, 2021, the PCAOB issued a report on its determination that it was unable to inspect or investigate PCAOB-registered public accounting firms headquartered in mainland China and Hong Kong because of positions taken by Chinese authorities in those jurisdictions. Our independent registered public accounting firm, KPMG Huazhen LLP, was subject to the determinations announced by the PCAOB on December 16, 2021.

 

On August 26, 2022, the PCAOB announced that it signed a Statement of Protocol with the CSRC and the Ministry of Finance, which it described as the first step toward opening access for the PCAOB to inspect and investigate completely registered public accounting firms in mainland China and Hong Kong.

 

On December 15, 2022, the PCAOB vacated its 2021 determination that the positions taken by authorities in mainland China and Hong Kong prevented it from inspecting and investigating completely registered public accounting firms headquartered in those jurisdictions. In view of the PCAOB’s decision to vacate its 2021 determination and until such time as the PCAOB issues any new adverse determination, the SEC has stated that there are no issuers at risk of having their securities subject to a trading prohibition under the HFCAA. However, whether the PCAOB will continue to be able to satisfactorily conduct inspections of PCAOB-registered public accounting firms headquartered in mainland China and Hong Kong is subject to uncertainty and depends on a number of factors out of our control.

 

Based upon these recent pronouncements from the PCAOB and the SEC, the Company expects that, upon the filing of this Form 10-K, it will be removed from the list of Commission-Identified Issuers. If the PCAOB in the future makes another determination it is not able to inspect and investigate completely registered public accounting firms in mainland China and Hong Kong, the Company will again become a Commission-Identified Issuer and subject to potential delisting pursuant to the HFCAA. Such delisting would limit the liquidity of our common stock and our access to U.S. capital markets, and could increase the volatility of the trading price of our stock, and as a result the market price of our common stock could be materially adversely affected.

 

On February 24, 2023, the CSRC and other PRC governmental authorities jointly issued the Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies (the “Confidentiality Provisions”), which will come into effect on March 31, 2023. The Confidentiality Provisions outline obligations of issuers listed in overseas markets with operations in China when they provide information involving state secrets or sensitive information to their securities service providers (e.g., auditors) and overseas regulators. In addition, under the Confidentiality Provisions, such issuers will also be required to obtain approval from the CSRC and other PRC authorities before accepting any investigation or inspection by overseas regulators. As the Confidentiality Provisions were recently promulgated and have not taken effect, there are uncertainties with respect to their interpretation and implementation.

 

Changes in political, business, economic and trade relations between the United States and China may have a material adverse impact on our business, results of operations and financial condition.

 

We cannot predict the possible changes in the economic, regulatory, social and political environment in the United States and China, nor can we predict their potential impact on political, economic and trade relations between the United States and China and on our business.

 

In 2019, the United States and China imposed new or higher tariffs on goods imported from each other. If the United States or China continues imposing such tariffs, or if additional tariffs or trade restrictions are implemented by the United States or by China, the resulting trade barriers could have a significant adverse impact on our business. The adoption and expansion of trade restrictions and tariffs, quotas and embargoes, sanctions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies, has the potential to adversely impact costs, our suppliers and the world economy in general, which in turn could have a material adverse effect on our business, results of operations and financial condition.

 

43

 

2022 Form 10-K


 

During 2020, political tensions between the United States and China escalated, with a number of actions taken by the U.S. government in response to perceived threats from Chinese-connected entities, such as the Clean Network program announced on August 5, 2020 to protect U.S. telecommunication and technology infrastructure, and the two executive orders issued by former President Trump on August 6, 2020 to ban any person or property subject to the jurisdiction of the United States from any transaction with ByteDance and from any transaction related to WeChat by any person or with respect to any property subject to the jurisdiction of the United States, to the extent that any such transaction is identified by the Secretary of Commerce as being subject to the prohibitions stated in the executive orders. In addition, on January 5, 2021, former President Trump signed an executive order banning transactions by any person, or with respect to any property, subject to the jurisdiction of the United States with persons that develop or control the following Chinese-connected software applications: Alipay, CamScanner, QQ Wallet, SHAREit, Tencent QQ, VMate, WeChat Pay, and WPS Office, some of which are critical to the operation of our business. These executive orders were revoked on June 9, 2021 by President Biden, who then signed an executive order directing the Department of Commerce to launch a national security review of apps with links to foreign adversaries (which is defined to include China) and issue recommendations for regulatory and legislative action to address the associated risks. Digital orders, including delivery, mobile orders and kiosk orders, accounted for approximately 89% of KFC and Pizza Hut’s Company sales in 2022, and digital payments, including mobile payments, accounted for approximately 99% of Yum China Company sales in 2022. As a result, the implementation of this executive order could adversely affect our business in a material way.

 

We cannot foresee whether and how developments in similar policy actions or any other policy actions taken by the U.S. or Chinese government will impact our business and financial performance. In addition, changes in political, business, economic and trade relations between the United States and China may trigger negative customer sentiment towards western brands in China, potentially resulting in a negative impact on our business, results of operations and financial condition.

 

Fluctuation in the value of RMB may result in foreign currency exchange losses.

 

The conversion of the Renminbi (“RMB”) into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China (“PBOC”). Historically, the exchange rate between RMB and the U.S. dollar has showed higher volatility in certain years while staying within a narrow range in other years. The value of RMB against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. It is difficult to predict how market forces or Chinese or U.S. government policy may impact the exchange rate between RMB and the U.S. dollar in the future.

 

Substantially all of our revenues and costs are denominated in RMB. As a Delaware holding company, we may rely on dividends and other fees paid to us by our subsidiaries in China. Any significant revaluation of RMB may materially affect our cash flows, net revenues, earnings and financial position, and the value of, and any dividends payable on, our common stock in U.S. dollars. For example, an appreciation of RMB against the U.S. dollar would make any new RMB-denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into RMB for such purposes. Conversely, a significant depreciation of RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our common stock. If we decide to convert RMB into U.S. dollars for the purpose of making payments for dividends on our common stock, strategic acquisitions or investments or other business purposes, the appreciation of the U.S. dollar against RMB would have a negative effect on U.S. dollar amounts available to us.

 

Few hedging options are available in China to reduce our exposure to exchange rate fluctuations. In addition, our currency exchange loss may be magnified by Chinese exchange control regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates and restrictions on exchange may have a material adverse effect on your investment.

 

The increasing focus on environmental sustainability issues may create operational challenges for us, increase our costs and harm our reputation.

 

There has been increasing public focus by governmental and non-governmental organizations and other stakeholders on environmental sustainability matters, including climate change and a circular economy. In 2021, we committed to a net-zero GHG reduction goal by 2050 in line with SBTi criteria to limit global temperature rise to 1.5oC above pre-industrial levels. In 2022, we set near-term science-based targets (SBTs), committing to reducing absolute Scope 1 and 2 GHG emissions 63% by 2035 from a 2020 base year and to reducing Scope 3 GHG emissions from purchased goods 66.3% per ton of goods purchased by 2035 from a 2020 base year. We face related risks including setting appropriate targets and taking actions to meet the commitments we made, and also increased pressure to make new sustainability commitments, which could expose us to additional operational challenges, execution costs and reputational risks. In line with the national standards and local requirements to reduce plastic waste in China, we have launched a series of plastic

44

 

2022 Form 10-K


 

reduction and environmentally friendly packaging initiatives across our brands. We are committed to gradually replacing existing plastic packaging with paper straws, wooden cutleries, paper bags, and biodegradable plastic bags, and working toward a 30% reduction on non-degradable plastic packaging weight by 2025. We may face operational challenges in sourcing suitable alternative packaging materials. In addition, we may incur significant costs for using alternative packaging materials, which in turn may have an adverse impact on our profit margins.

 

Interventions in or the imposition of restrictions and limitations by the PRC government on currency conversion and payments of foreign currency and RMB out of mainland China may limit our ability to utilize our cash balances effectively, including making funds held by our China-based subsidiaries unavailable for use outside of mainland China, which could limit or eliminate our ability to pay dividends and affect the value of your investment.

 

The Chinese government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of both foreign currency and RMB out of mainland China. Under our current corporate structure as a Delaware holding company, our income is primarily derived from the earnings from our Chinese subsidiaries. Substantially all revenues of our Chinese subsidiaries are denominated in RMB. Shortages in the availability of foreign currency and control on payments out of mainland China may restrict the ability of our Chinese subsidiaries to remit sufficient foreign currency and/or RMB to pay dividends or to make other payments to us, or otherwise to satisfy their obligations. Under existing Chinese foreign exchange regulations, payments of current account items, including profit distributions, license fee payments and expenditures from trade-related transactions, can be made in foreign currencies or RMB without prior approval from China’s State Administration of Foreign Exchange (“SAFE”) and the PBOC by complying with certain procedural requirements. However, for any Chinese company, dividends can be declared and paid only out of the retained earnings of that company under Chinese law. Furthermore, approval from SAFE or its local branch may be required where RMB are to be converted into foreign currencies, and approval from SAFE and the PBOC or their branches may be required where foreign currency and/or RMB are to be remitted out of mainland China. Specifically, under the existing restrictions, without a prior approval from SAFE and the PBOC, cash generated from the operations of our subsidiaries in China may not be used to pay dividends to Yum China, pay the license fee to YUM, pay employees who are located outside mainland China, pay off debt owed by our subsidiaries to entities outside mainland China, or make capital expenditures outside mainland China.

 

The Chinese government may also at its discretion restrict access in the future to foreign currencies or further restrict payments of foreign currency and RMB out of mainland China. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands or restricts us from paying the license fee to YUM, we may not be able to pay dividends to our stockholders, fulfill our license fee payment obligation, pay out service fees to vendors and repay our indebtedness when due, and, to the extent we undertake such activities, to make investments or acquisitions outside China.

 

Furthermore, because repatriation of funds and payment of license fees require the prior approval of SAFE and PBOC, such repatriation and payment could be delayed, restricted or limited. There can be no assurance that the rules and regulations pursuant to which SAFE and PBOC grant or deny approvals will not change in a way that adversely affects the ability of our Chinese subsidiaries to repatriate funds out of mainland China or pay license fees. Any such limitation could materially and adversely affect our ability to pay dividends or otherwise fund and conduct our business.

 

Changes in the laws and regulations of China or noncompliance with applicable laws and regulations may have a significant impact on our business, results of operations and financial condition, and may cause the value of our securities to decline.

 

Our business and operations are subject to the laws and regulations of China, which continue to evolve and are subject to change from time to time. The Chinese government may intervene or influence our operations at any time, which could result in a material change in our operations. Recently, the Chinese government has increased its regulatory focus on matters including anti-monopoly and unfair competition rules, cybersecurity and regulation of variable interest entities and has initiated various regulatory actions, statements and enforcement proceedings to regulate business operations in China with little advance notice.

 

45

 

2022 Form 10-K


 

For example, Chinese regulators, including the CAC, have been increasingly focused on regulation in the areas of data security and data protection, and are enhancing the protection of privacy and data security by rulemaking and enforcement actions at central and local levels. We expect that these areas will receive greater and continued attention from regulators and the public going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with data security and protection. For more information regarding risks relating to cybersecurity and related regulation, see “—The PRC government has significant oversight and discretion to exert control over offerings of our securities conducted outside of China and foreign investment in China-based issuers, and may limit or completely hinder our ability to offer securities to investors, which may cause the value of such securities to significantly decline” and “—Risks Related to Our Business and Industry—Unauthorized access to, or improper use, disclosure, theft or destruction of, our customer or employee personal, financial or other data or our proprietary or confidential information that is stored in our information systems or by third parties on our behalf could result in substantial costs, expose us to litigation and damage our reputation.”

 

Chinese regulators have also focused recently on enforcement of anti-monopoly and unfair competition rules, which may affect our ability to carry out our investment and acquisition strategy, and on regulation of variable interest entities. For more information, see “—Risks Related to Doing Business in China—Regulations regarding acquisitions may impose significant regulatory approval and review requirements, which could make it more difficult for us to pursue growth through acquisitions” and “—The Chinese government may determine that the variable interest entity structure of Daojia does not comply with Chinese laws on foreign investment in restricted industries.”

 

Additionally, on January 9, 2021, China’s Ministry of Commerce (“MOFCOM”) issued the Rules on Blocking Improper Extraterritorial Application of Foreign Legislation and Other Measures (the “Blocking Rules”), which established a blocking regime in China to counter the impact of foreign sanctions on Chinese persons. The Blocking Rules have become effective upon issuance, but have only established a framework of implementation, and the rules’ effects will remain unclear until the Chinese government provides clarity on the specific types of extraterritorial measures to which the rules will apply. At this time, we do not know the extent to which the Blocking Rules will impact our operations.

 

The continuation of our operations also depends upon compliance with, among other things, applicable Chinese environmental, health, safety, labor, social security, pension and other laws and regulations. There is no assurance that we will be able to comply fully with existing or future applicable laws and regulations. In addition, the interpretations of many laws and regulations are not always uniform and enforcement of these laws and regulations involve uncertainties. Changing legal and regulatory requirements could force us to make material changes to our operations. Additionally, failure to comply with such laws and regulations could result in fines, penalties or lawsuits. In such an event, our business, results of operations and financial condition may be adversely affected, which could cause the value of our securities to decline.

 

We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries in China to fund offshore cash requirements.

 

We are a holding company and conduct all of our business through our operating subsidiaries. We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries for our cash requirements. As noted above, distributions to us from our subsidiaries may result in incremental tax costs.

 

The laws, rules and regulations applicable to our Chinese subsidiaries permit payments of dividends only out of their accumulated profits, if any, determined in accordance with applicable Chinese accounting standards and regulations. In addition, under Chinese law, an enterprise incorporated in China is required to set aside at least 10% of its after-tax profits each year, after making up previous years’ accumulated losses, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. As a result, our Chinese subsidiaries are restricted in their ability to transfer a portion of their net assets to us in the form of dividends. At the discretion of the board of directors, as an enterprise incorporated in China, each of our Chinese subsidiaries may allocate a portion of its after-tax profits based on Chinese accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. Any limitation on the ability of our Chinese subsidiaries to pay dividends or make other distributions to us could limit our ability to make investments or acquisitions outside of China that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

 

46

 

2022 Form 10-K


 

In addition, the EIT Law and its implementation rules provide that a withholding tax at a rate of 10% will be applicable to dividends payable by Chinese companies to companies that are not China resident enterprises unless otherwise reduced according to treaties or arrangements between the Chinese central government and the governments of other countries or regions where the non-China resident enterprises are incorporated. Hong Kong has a tax arrangement with mainland China that provides for a 5% withholding tax on dividends distributed to a Hong Kong resident enterprise, upon meeting certain conditions and requirements, including, among others, that the Hong Kong resident enterprise directly owns at least 25% equity interests of the Chinese enterprise and is a “beneficial owner” of the dividends. We believe that our principal Hong Kong subsidiary, which is the equity holder of our Chinese subsidiaries operating substantially all of our KFC and Pizza Hut restaurants, met the relevant requirements pursuant to the tax arrangement between the mainland China and Hong Kong in 2018 and is expected to meet the requirements in subsequent years, thus, it is more likely than not that our dividends or earnings expected to be repatriated to our principal Hong Kong subsidiary since 2018 are subject to the reduced withholding tax of 5%. However, if the Hong Kong subsidiary is not considered to be the “beneficial owner” of the dividends by the Chinese local tax authority, any dividend paid to it by our Chinese subsidiaries would be subject to a withholding tax rate of 10% with retrospective effect, which would increase our tax liability and reduce the amount of cash available to our company.

 

Restrictive covenants in bank credit facilities, joint venture agreements or other arrangements that we or our subsidiaries may enter into in the future may also restrict the ability of our subsidiaries to pay dividends or make distributions or remittances to us. These restrictions could reduce the amount of dividends or other distributions we receive from our subsidiaries, which in turn could restrict our ability to return capital to our stockholders in the future.

 

Under the EIT Law, if we are classified as a China resident enterprise for Chinese enterprise income tax purposes, such classification would likely result in unfavorable tax consequences to us and our non-Chinese stockholders.

 

Under the EIT Law and its implementation rules, an enterprise established outside China with a “de facto management body” within China is considered a China resident enterprise for Chinese enterprise income tax purposes. A China resident enterprise is generally subject to certain Chinese tax reporting obligations and a uniform 25% enterprise income tax rate on its worldwide income. Furthermore, under the EIT Law, if we are a China resident enterprise (i) dividends paid by us to our non-Chinese stockholders would be subject to a 10% dividend withholding tax or a 20% individual income tax if the stockholder is an individual and (ii) such non-Chinese stockholders may become subject to Chinese tax and filing obligations as well as withholding with respect to any disposition of our stock, subject to certain treaty or other exemptions or reductions.

 

Yum China and each subsidiary of Yum China that is organized outside of China intends to conduct its management functions in a manner that does not cause it to be a China resident enterprise, including by carrying on its day-to-day management activities and maintaining its key records, such as resolutions of its board of directors and resolutions of stockholders, outside of China. As such, we do not believe that Yum China or any of its non-Chinese subsidiaries should be considered a China resident enterprise for purposes of the EIT Law. However, given the uncertainty regarding the application of the EIT Law to us and our future operations, there can be no assurance that we or any of our non-Chinese subsidiaries will not be treated as a China resident enterprise now or in the future for Chinese tax law purposes.

 

47

 

2022 Form 10-K


 

We and our stockholders face uncertainty with respect to indirect transfers of equity interests in China resident enterprises through transfer of non-Chinese-holding companies. Enhanced scrutiny by the Chinese tax authorities may have a negative impact on potential acquisitions and dispositions we may pursue in the future.

 

In February 2015, the STA issued Bulletin 7, pursuant to which an “indirect transfer” of Chinese taxable assets, including equity interests in a Chinese resident enterprise, by a non-resident enterprise may be re-characterized and treated as a direct transfer of Chinese taxable assets, if such arrangement does not have reasonable commercial purpose and the transferor avoids payment of Chinese enterprise income tax. Where a non-resident enterprise conducts an “indirect transfer” of Chinese interests by disposing of equity interests in an offshore holding company that directly or indirectly owns Chinese interests, the transferor, transferee and/or the China resident enterprise may report such indirect transfer to the relevant Chinese tax authority, which may in turn report upward to the STA. Using general anti-tax avoidance provisions, the STA may treat such indirect transfer as a direct transfer of Chinese interests if the transfer avoids Chinese tax by way of an arrangement without reasonable commercial purpose. As a result, gains derived from such indirect transfer may be subject to Chinese enterprise income tax, and the transferee or other person who is obligated to pay for the transfer would be obligated to withhold the applicable taxes, currently at a rate of up to 10% of the capital gain in the case of an indirect transfer of equity interests in a China resident enterprise. Both the transferor and the party obligated to withhold the applicable taxes may be subject to penalties under Chinese tax laws if the transferor fails to pay the taxes and the party obligated to withhold the applicable taxes fails to withhold the taxes. However, the above regulations do not apply if either (i) the selling non-resident enterprise recognizes the relevant gain by purchasing and selling equity of the same listed enterprise in the open market (the “listed enterprise exception”); or (ii) the selling non-resident enterprise would have been exempted from enterprise income tax in China pursuant to applicable tax treaties or tax arrangements, if it had directly held and transferred such Chinese interests that were indirectly transferred. The China indirect transfer rules do not apply to gains recognized by individual stockholders. However, in practice, there have been a few reported cases of individuals being taxed on the indirect transfer of Chinese interests and the law could be changed so as to apply to individual stockholders, possibly with retroactive effect. In addition, the PRC Individual Income Tax Law and relevant regulations (“IITL”), revised effective January 1, 2019, impose general anti-avoidance tax rules (“GAAR”) on transactions conducted by individuals. As a result, if the China tax authority invokes the GAAR and deems that indirect transfers made by individual stockholders lack reasonable commercial purposes, any gains recognized on such transfers might be subject to individual income tax in China at the standard rate of 20%.

 

It is unclear whether stockholders that acquired our stock through the distribution or the Global Offering will be treated as acquiring such stock in an open market purchase. If such stock is not treated as acquired in an open market purchase, the listed transaction exception will not be available for transfers of such stock. We expect that transfers in open market transactions of our stock by corporate or other non-individual stockholders that have purchased our stock in open market transactions will not be taxable under the China indirect transfer rules due to the listed enterprise exception. Transfers, whether in the open market or otherwise, of our stock by corporate and other non-individual stockholders that acquired our stock in the distribution or the Global Offering or in non-open market transactions may be taxable under the China indirect transfer rules and our China subsidiaries may have filing obligations in respect of such transfers, upon the request of relevant Chinese tax authorities. Transfers of our stock in non-open market transactions by corporate and other non-individual stockholders may be taxable under the China indirect transfer rules, whether or not such stock was acquired in open market transactions, and our China subsidiaries may have filing obligations in respect of such transfers upon the request of relevant Chinese tax authorities. Corporate and other non-individual stockholders may be exempt from taxation under the China indirect transfer rules with respect to transfers of our stock if they are tax resident in a country or region that has a tax treaty or arrangement with China that provides for a capital gains tax exemption and they qualify for that exemption.

 

In addition, we may be subject to these indirect transfer rules in the event of any future sale of a China resident enterprise through the sale of a non-Chinese holding company, or the purchase of a China resident enterprise through the purchase of a non-Chinese holding company. Our company and other non-resident enterprises in our group may be subject to filing obligations or taxation if our company and other non-resident enterprises in our group are transferors in such transactions, and may be subject to withholding obligations if our company and other non-resident enterprises in our group are transferees in such transactions.

48

 

2022 Form 10-K


 

 

There may be difficulties in effecting service of legal process, conducting investigations, collecting evidence, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us and our management.

 

We conduct substantially all of our operations in China and substantially all of our long-lived assets are located in China. Our executive officers, including our Chief Executive Officer and Chief Financial Officer, and a majority of our directors reside within mainland China and/or Hong Kong or spend significant amounts of time in mainland China and/or Hong Kong. As a result, it may not be possible to effect service of process within the United States or elsewhere outside of China upon these persons, including with respect to matters arising under applicable U.S. federal and state securities laws. In addition, there are significant legal and other obstacles in China to providing information needed for regulatory investigations or litigation initiated by regulators outside China. Overseas regulators may have difficulties in conducting investigations or collecting evidence within China. It may also be difficult for investors to bring an original lawsuit against us or our directors or executive officers based on U.S. federal securities laws in a Chinese court. Moreover, China does not have treaties with the United States providing for the reciprocal recognition and enforcement of judgments of courts. Therefore, even if a judgment were obtained against us or our management for matters arising under U.S. federal or state securities laws or other applicable U.S. federal or state law, it may be difficult to enforce such a judgment.

 

The Chinese government may determine that the variable interest entity structure of Daojia does not comply with Chinese laws on foreign investment in restricted industries.

 

Through the acquisition of Daojia, we also acquired a variable interest entity (“VIE”) and subsidiaries of the VIE in China effectively controlled by Daojia.

 

Chinese laws and regulations restrict and impose conditions on foreign investment in certain internet business, such as internet content services. For example, foreign investors are generally not permitted to own more than 50% of the equity interests in an internet content provider or other value-added telecommunication service provider. Accordingly, a VIE structure has been adopted by many China-based companies, including Daojia, to obtain necessary licenses and permits in such industries that are currently subject to foreign investment restrictions in China. Daojia operates these businesses in China through its consolidated affiliated entities. Daojia has entered into a series of contractual arrangements with its consolidated affiliated entities and the nominee shareholders of its consolidated affiliated entities. These contractual arrangements allow Daojia to:

receive substantially all of the economic benefits and absorb all of the expected losses from its consolidated affiliated entities;
exercise effective control over its consolidated affiliated entities; and
hold an exclusive option to purchase all or part of the equity interests in its consolidated affiliated entities when and to the extent permitted by Chinese law.

 

However, the VIE structure and contractual arrangements described above may not be as effective in providing control over Daojia’s consolidated affiliated entities as direct ownership. The VIE structure may result in unauthorized use of indicia of corporate power or authority, such as chops and seals. Control over Daojia’s consolidated affiliated entities may also be jeopardized if the shareholders holding equity interest in the consolidated affiliated entities breach the terms of the contractual agreements.

In addition, there are substantial uncertainties regarding the interpretation and application of current Chinese laws, rules and regulations related to VIE structure. It is also uncertain whether any new Chinese laws, rules or regulations relating to VIE structure will be adopted, or if adopted, what their implications would be on Daojia. If the VIE structure is found to be in violation of any existing or future Chinese laws, rules or regulations, the relevant PRC regulatory bodies would have broad discretion to take action in dealing with these violations, including revoking the business and operating licenses of Daojia’s consolidated affiliated entities, requiring Daojia to restructure its operations or taking other regulatory or enforcement actions against Daojia. The contractual arrangements may also be (i) disregarded by the PRC tax authorities and result in increased tax liabilities; or (ii) found by Chinese government authorities, courts or arbitral tribunals to be unenforceable. Any of the foregoing could result in a material adverse effect on Daojia’s business operations.

 

49

 

2022 Form 10-K


 

Certain defects caused by non-registration of our lease agreements related to certain properties occupied by us in China may materially and adversely affect our ability to use such properties.

 

As of December 31, 2022, we leased over 10,000 properties in China, and to our knowledge, the lessors of most properties leased by us, most of which are used as premises for our restaurants, had not registered the lease agreements with government authorities in China.

 

According to Chinese laws, a lease agreement is generally required to be registered with the relevant land and real estate administration bureau. However, the enforcement of this legal requirement varies depending on the local regulations and practices and, in cities where we operate a significant number of restaurants, the local land and real estate administration bureaus no longer require registration or no longer impose fines for failure to register the lease agreements. In addition, our standard lease agreements require the lessors to make such registration and, although we have proactively requested that the applicable lessors complete or cooperate with us to complete the registration in a timely manner, we are unable to control whether and when such lessors will do so.

 

A failure to register a lease agreement will not invalidate the lease agreement but may subject the parties to a fine. Depending on the local regulations, the lessor alone or both the lessor and lessee are under the obligation to register a lease agreement with the relevant land and real estate administration bureau. In the event that a fine is imposed on both the lessor and lessee, and if we are unable to recover from the lessor any fine paid by us based on the terms of the lease agreement, such fine will be borne by us.

 

To date, the operation of our restaurants has not been materially disrupted due to the non-registration of our lease agreements. No fines, actions or claims have been instituted against us or, to our knowledge, the lessors with respect to the non-registration of our lease agreements. However, we cannot assure you that our lease agreements relating to, and our right to use and occupy, our premises will not be challenged in the future.

 

Our restaurants are susceptible to risks in relation to unexpected land acquisitions, building closures or demolitions.

 

The Chinese government has the statutory power to acquire any land use rights of land plots and the buildings thereon in China in the public interest subject to certain legal procedures. Under the Regulations for the Expropriation of and Compensation for Housing on State-owned Land, issued by the State Council, which became effective as of January 21, 2011, there is no legal provision that the tenant of an expropriated property is entitled to compensation. Generally speaking, only the owner of such property is entitled to compensation from the government. The claims of the tenant against the landlord will be subject to the terms of the lease agreement. In the event of any compulsory acquisition, closure or demolition of any of the properties at which our restaurants or facilities are situated, we may not receive any compensation from the government or the landlord. In such event, we may be forced to close the affected restaurant(s) or relocate to other locations, which may have an adverse effect on our business and results of operations.

 

Any failure to comply with Chinese regulations regarding our employee equity incentive plans may subject Chinese plan participants or us to fines and other legal or administrative sanctions.

 

Pursuant to SAFE Circular 37, China residents who participate in share incentive plans in overseas non-publicly listed companies may submit applications to SAFE or its local branches for foreign exchange registration with respect to offshore special purpose companies. We and our directors, executive officers and other employees who are Chinese citizens or who have resided in China for a continuous period of not less than one year and who have been granted restricted shares, restricted stock units (“RSUs”), performance share units (“PSUs”), stock appreciation rights (“SARs”), or stock options (collectively, the “share-based awards”) are subject to the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, issued by SAFE in February 2012, according to which, employees, directors, supervisors and other management members participating in any stock incentive plan of an overseas publicly-listed company who are Chinese citizens or who are non-Chinese citizens residing in China for a continuous period of not less than one year, subject to limited exceptions, are required to register with SAFE through a domestic qualified agent, which could be a Chinese subsidiary of such overseas listed company, and complete certain other procedures. Failure to complete SAFE registrations may result in fines and legal sanctions and may also limit our ability to make payments under our equity incentive plans or receive dividends or sales proceeds related thereto, or our ability to contribute additional capital into our wholly-foreign owned enterprises in China and limit our wholly-foreign owned enterprises’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional equity incentive plans for our directors and employees under Chinese law.

 

50

 

2022 Form 10-K


 

In addition, the STA has issued circulars concerning employees’ share-based awards. Under these circulars, employees working in China who exercise share options and SARs, or whose restricted shares, RSUs or PSUs vest, will be subject to Chinese individual income tax. The Chinese subsidiaries of an overseas listed company have obligations to file documents related to employees’ share-based awards with relevant tax authorities and to withhold individual income taxes of those employees related to their share-based awards. Although we currently intend to withhold income tax from our Chinese employees in connection with their exercise of options and SARs and the vesting of their restricted shares, RSUs and PSUs, if the employees fail to pay, or our Chinese subsidiaries fail to withhold, their income taxes according to relevant laws, rules and regulations, our Chinese subsidiaries may face sanctions imposed by the tax authorities or other Chinese government authorities.

 

Failure to make adequate contributions to various employee benefit plans as required by Chinese regulations may subject us to penalties.

 

Companies operating in China are required to participate in various government-sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of their employees up to a maximum amount specified by the local government from time to time at locations where they operate their businesses. While we believe we comply with all material aspects of relevant regulations, the requirements governing employee benefit plans have not been implemented consistently by the local governments in China given the different levels of economic development in different locations. If we are subject to late fees or fines in relation to the underpaid employee benefits, our results of op