Yum China’s sales keep growing, but a fierce food delivery price war may be weighing on investor sentiment

Analysts point to one possible reason for the mismatch between Yum China’s strong results and investor unease

That’s shaking up not just the food dery market, but the companies that make the food as well— Yum China—even as deries surge in the short-term

Investor fears could be partly due to worries that “the dery subsidy might not continue,” wrote HSBC analysts in a Wednesday report. “Once the subsidy ends, [Yum China’s] earnings will be negatively impacted.” For now, HSBC maintained its “buy” rating on Yum China’s stock and increased its target price

CEO Joey Wat called “intense dery platform competition” the “biggest dynamic” in the quarter, in a post-earning briefing with analysts

It’s the sign of how price wars and aggressive discounting—decried by both officials and leaders as “irrational consumption”—is shaking investor faith in China’s largest companies

Food dery wars JD.com’s entry into the food dery market has shaken up a sector dominated by Meituan and Alibaba-owned Ele.me

In February, JD unveiled JD Takeaway, mising zero commissions for merchants who joined early

Founder Richard Liu has made food dery a key part of the company’s strategy, particularly as the e-commerce giant has floundered compared to its Big peers

Liu even donned a uniform to der meals himself

Transactions on these platforms surged from 100 million daily orders at the start of the year to 250 million by mid-July, according to the South China Morning Post

In mid-July, the State Administration for Market Regulation, China’s top regulator, summoned all three companies to “encourage rational competition” and “foster a healthy ecosystem.” Chinese officials are starting to push back against aggressive price wars across China’s economy, particularly in the cut-throat EV sector

Officials have termed this excessive competition “involution,” meaning that companies are increasing resources to grab market without receiving a portional return

On August 1, all three food dery companies—Meituan, JD and Alibaba—agreed to a truce in their price war

Yum China now operates 16,798 outlets across the world’s second-largest economy, primarily KFC and Pizza Hut outlets. (Yum China is No. 373 on the Fortune 500, making it one of the few companies on the list of the U.S.’s largest companies by revenue that makes most of its revenue overseas) Yum China reported $2.8 billion in revenue for the most recent quarter, a 4% increase year-on-year

The company reported $215 million in quarterly net income, a 1% increase

The company is embarking on an aggressive expansion into China’s second-tier cities, hoping that affordable offerings coffee and smaller pizzas will win over lower-income consumers

Dery is the largest source of sales for Yum China, compared to dine-in and take-away

On Yum China’s earnings call, analysts asked what subsidies and the food dery price war meant for the company’s earnings

Ding declined to the specific of subsidies paid by Yum China versus the platform operators, though suggested that larger merchants Yum China “enjoy more favorable subsidy arrangement and subsidy split.” He also affirmed that Yum China expects margins to remain steady, guidance which takes dery subsidies into account

Wat referred to a previous instance of fierce subsidy competition in 2017, the last bout of fierce competition between Meituan and Alibaba. “One lesson we learned is [that] we don’t buy sales,” Wat said

Yum China’s Pizza Hut was “a bit aggressive” in pursuing subsidies, “but then by 2018, when the subsidy was pulled, the sales suffered quite a bit.” “We need to tect the price integrity,” she said. “Otherwise it just does not work

The numbers don’t work.”