Analyst Sees Possible Yum China Spin Off

Yum Brands Inc.'s

expected 13 percent drop in second-quarter same-store sales for its China unit could drive a spin-off of the operation on the Hong Kong stock exchange, an analyst said Thursday. Yum's fast-growing China division produces about half of Yum's total revenue and includes 6,200 restaurants, mostly KFCs and Pizza Huts. The company said Wednesday that bad publicity in June about two Chinese suppliers' food-handling fax pas has led to a rough patch for the business. Stifel's Paul Westra said volatility in China operations heightens the chance it could separate from Yum with a listing on the Hong Kong stock exchange. Citing the recent deal to acquire Tim Hortons Inc.

by Burger King Worldwide Inc.

, Westra added that an activist shareholder or management "will next view Yum's $6.5 billion-plus of borrowing as an easy value-creating debt-to-equity swap opportunity." Westra called Yum's China unit "one of the best retail businesses on the globe." Even with the negative food-scare impacts, Westra expects the unit's return on equity for 2015 will be more than 22 percent and equal to that of Starbucks USA

. Westra reiterated a Buy rating and $110 target on Yum and expects China comps will turn positive by the middle of the fourth quarter. Yum opened sharply lower Wednesday but had largely recovered by late morning, trading recently at $71.11 a share, down 0.5 percent.