I write this letter with mixed emotions. We are joyful and proud to report another set of outstanding results for 2019, our third full year as an independent, publicly-traded company. At the same time, we are cautiously managing the impacts arising from the novel coronavirus (“COVID-19”) outbreak, and we remain optimistic on the long-term growth potential of our business in China. As you review our performance in the pages that follow, you will see that 2019 was another solid year. We achieved strong growth in total revenues and same store sales, opened over 1,000 new stores, and strengthened our operations across multiple aspects. Most importantly, we grew earnings per share and rewarded stockholders with a significant return. We have now delivered over $1 billion to stockholders via dividends and share repurchases since becoming an independent company. We also maintain a healthy balance sheet and cash position that would enable us to withstand unexpected challenges. Innovation Powering Growth Our vision is to be the world’s most innovative pioneer in the restaurant industry. Innovation has been powering our growth, as we highlighted at our investor day in March 2019. Customers are drawn to us for four reasons: delicious food; great value; a pleasant customer experience enhanced by our digital efforts; and convenience. In 2019, we made meaningful progress in each of these strategic areas. Let’s start with the core of our business, the food. Our customers expect delicious new menu alternatives, and we constantly seek to exceed their expectations. We are continuously refreshing our menu, introducing popular new items such as Double Chili Chicken at KFC, or Durian Pie at Pizza Hut. Our new Innovation Center in Shanghai demonstrates our commitment to offering new, delicious, high value menu alternatives. The test kitchen in Yum China’s new Innovation Center in Shanghai +4% or +9%* +3%* 1,006 9,200 Total Revenues Growth h Same-store sales growth New Stores, entered 100+ new cities stores at year end 2019 $1.08 billion in terms of dividends and shares repurchases since spin-off $1.66 billion in cash, cash equivalents and short term investments at year end 2019 * Excluding foreign exchange impact. This letter contains “forward-looking statements.” We intend all forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Refer to page 1 of our Annual Report on Form 10-K for additional information. KFC Coffee (left) and Super (right) privilege subscription programs Pizza Hut Family (left) and Steak (right) privilege subscription programs KFC Double Chili Chicken Pizza Hut Durian Pie Second, we offer great value, providing delicious meals at price points accessible to consumers. In 2019, we minimized price increases by managing food costs through enhanced operating efficiencies. Additionally, our smart value promotions such as Crazy Thursday at KFC and Scream Wednesday at Pizza Hut continue to be popular. These great promotions not only appealed to our customers but also protected our margins. >240 million members — KFC and Pizza Hut combined Third, our digital strategy is proving effective in strengthening the relationship with our customers, thus increasing loyalty and driving sales. Our KFC and Pizza Hut Super Apps offer customers a multi- faceted, fully-digitized experience. For example, pre- order or tableside order, loyalty point accumulation and redemption, social gifting and birthday party reservations can all be done via the Super Apps. Digital also improves our marketing efficiency by enabling us to better understand customer behavior, and thereafter tailor offers and promotions accordingly. In our experience, this is far more powerful and cost-effective than mass marketing. For example, our privilege subscription programs successfully increased frequency and sales to members. Overall, KFC and Pizza Hut’s combined digital membership grew by a third to over 240 million at the end of 2019, and members contributed about half of our sales. We also made further strides in building out our digital ecosystem, with the rollout of YUMC Pay (in partnership with Union Pay) which offers a convenient payment option for users within our super APPs. Fourth and finally, we are committed to creating more convenience in how customers access our menu. Delivery continued to ramp significantly during the year, especially via our own channels, as opposed to third-party aggregators. Furthermore, our convenient mobile ordering and kiosk ordering are becoming more popular. They also free up our store staff for other in- store functions, making our restaurants more efficient and customer-focused. KFC Pocket Store won three Gold Cannes Lions in 2019 1 Investing for Success in 2020 and Beyond We believe our success in 2019 reflects only a fraction of what we can achieve. We are confident in the long- term market opportunities in China and are focused on key elements of our growth strategy. Most importantly, we expect to continue opening new stores rapidly yet prudently, focusing on high potential locations across city tiers, and entering new cities and trade zones. We are also exploring various new store formats to support further penetration and new designs to keep our stores fresh and modern. In addition, we expect to support sales growth by growing underpenetrated dayparts and food categories, as well as further engaging our members while driving delivery. We will also step up investments in our emerging brands, refining the formulas and expanding store counts. We see immense potential in the coffee market and are excited to serve new customers in this space. We grew our COFFii & JOY brand to over 50 stores, and entered into a joint- venture partnership with Lavazza, a leading coffee brand in Italy, to establish its first flagship store in Asia. Additionally, our acquisition of a controlling interest in the Huang Ji Huang group is expected to close in the first half of 2020, further fueling our growth in the Chinese cuisine market. 2 In addition to customer-facing digital initiatives, we will step up investments in IT and our supply chain. We are using technology to enable our operations to be efficient, nimble and flexible. For instance, our integrated supply chain management system enables us to quickly and efficiently launch new products and promotions at the national, regional or even store level. We believe digital and data driven analytics will continue to improve our food safety and quality assurance processes, further cementing our leadership in this crucial area. Our IT investments are also expected to enable greater efficiency in operations. We now utilize AI-based technology for store-level hourly sales forecasting, which supports better labor scheduling and inventory management. In addition to Pocket Manager, a mobile phone app rolled out last year for restaurant managers to monitor the performance of their restaurants, we started to roll out smart watches, enabling restaurant managers to closely monitor ordering and serving status. Achieving Success Responsibly: We CARE Our operating objectives extend beyond delivering great financial performance; we also aim to be a model for great corporate citizenship. We characterize our social responsibility efforts with the acronym CARE: Creating A Responsible Ecosystem. CARE is a sustainability strategy that drives the continuous improvement of our environmental, social and governance (ESG) performance. We execute CARE in a variety of ways. For instance, we are committed to fostering a professional and inclusive workplace for all of our 450,000 employees. We are also committed to providing safe and nutritious food in a way that is economically, socially and environmentally sustainable. We want Yum China to positively impact all our stakeholders: employees, customers, stockholders, suppliers, communities and the environment. Family care is one example of our commitment to our employees. We started offering our family care program to our restaurant general managers in 2018, designed to provide additional health protection for their family members. As of the end of 2019, over 5,700 of our restaurant general managers and their 18,000 family members had benefited from this program. In 2020, we are extending the family care coverage to over 31,000 of our restaurant management team members and their 86,000 family members. We are going above and beyond others in the market, by increasing the age cap to 75 for employees’ parents and 22 for their children. We are increasingly being recognized for our commitment to socially responsible management practices. For the second consecutive year, the Top Employer Institute certified us as a top employer in China. This global certification program recognizes leading employers in more than 115 countries that are dedicated to providing an exceptional working environment through progressive “People First” human resources practices. In addition, Yum China was included in the Bloomberg Gender-Equality Index for the second consecutive year. This index recognizes companies committed to transparency in gender reporting and to advancing women’s equality. We are one of only three companies from mainland China included in the index. Our environmental priorities have been guided by the Reduce, Reuse, Recycle and Replace (4R) Principles. In 2019, we were very proud to become the first restaurant company in China to supply our ISCC Certified used cooking oil as a sustainable feedstock for biodiesel production. We are committed to reducing water consumption, energy consumption, greenhouse gas emissions and disposable packaging, and are actively promoting our sustainability concepts and practices with our suppliers to create a responsible ecosystem. KFC and Pizza Hut restaurants providing free meals with contactless delivery service to medical workers in Wuhan and across the country 3 China team has also been a source of tremendous pride for me, as I have witnessed first-hand the dedication, innovation and flexibility of each and every one of our employees, working tirelessly to ensure minimal supply chain and operational disruption. I am confident that our hard work will pay off as conditions return to normal. Importantly, we are supporting the communities we serve even at this challenging moment. Our KFC and Pizza Hut teams have led the delivery of over 137,000 free meals to over 1,200 hospitals and community health centers in more than 28 provinces and cities across mainland China. We also donated RMB 3 million to the Red Cross to support their effort to fight the outbreak. We are managing the situation today, and are prepared for the recovery tomorrow. I am honored to lead this great company and work alongside a dedicated management team and outstanding workforce. Together, we will build an even stronger, nimbler and more innovative company that delivers value to its employees, customers, stockholders, communities and the environment. Managing the Impact of COVID-19 As I write this, the COVID-19 situation is still evolving. Our foremost concern is the health and safety of our customers, employees and business partners. We implemented controls following guidance from the relevant authorities to minimize the risk of infection at our stores. We also pioneered contactless delivery and pick up, as well as corporate catering services as safe and desirable alternatives for customers to enjoy our meals. As discussed at the 2019 fourth quarter earnings release call, we closed a significant portion of our stores during the Chinese New Year holiday period. Since that time, more companies have restarted work and travel and quarantine restrictions are gradually being lifted in China, and we have been gradually reopening stores on a partial or fully operational basis. Concurrently, we have seen our delivery and takeaway sales gain traction as consumer awareness increases. However, we remain cautious as the situation continues to evolve. As you can anticipate, the COVID-19 situation has impacted our results. Fortunately, we are a fortified and resilient company that is well positioned to weather this storm. The rapid response of the Yum Joey Wat Chief Executive Officer 4 Yum China Holdings, Inc. 7100 Corporate Drive Plano, Texas 75024 United States of America Yum China Building 20 Tian Yao Qiao Road Shanghai 200030 People’s Republic of China March 27, 2020 Dear Fellow Stockholders: We are pleased to invite you to attend the 2020 Annual Meeting of Stockholders of Yum China Holdings, Inc. (the “Annual Meeting”). The Annual Meeting will be held on Friday, May 8, 2020, at 8:00 a.m. Beijing/Hong Kong time (Thursday, May 7, 2020, at 8:00 p.m. U.S. Eastern time). In light of public health concerns regarding the novel coronavi- rus (COVID-19) outbreak and related travel restrictions, the Board of Directors has determined that it is prudent to hold the Annual Meeting in a virtual-only format this year. You may attend the Annual Meeting via the internet at www.virtualshareholdermeeting.com/YUMC2020. To participate in the Annual Meeting, you will need the 16-digit control number which appears on your Notice of Internet Availability of Proxy Materials (the “Notice”), proxy card or the instructions that accompanied your proxy materials. P r o x y S t a t e m e n t The attached notice of annual meeting and proxy statement contain details of the business to be conducted at the Annual Meeting and the detailed procedures for attending, submitting questions and voting at the Annual Meeting. In addition, the Company’s 2019 annual report, which is being made available to you along with the proxy statement, contains infor- mation about the Company and its performance. Your vote is important. We encourage you to vote promptly, whether or not you plan to attend the Annual Meeting. You may vote your shares over the Internet or via telephone. If you received a paper copy of the proxy materials, you may complete, sign, date and mail the proxy card in the postage-paid envelope provided. Sincerely, Joey Wat Chief Executive Officer Yum China Holdings, Inc. Notice Of Annual Meeting Of Stockholders Time and Date: 8:00 a.m. Beijing/Hong Kong time on Friday, May 8, 2020 / 8:00 p.m. U.S. Eastern time on Thursday, May 7, 2020. Location: Online at www.virtualshareholdermeeting.com/YUMC2020. Items of Business: (1) To elect the 11 director nominees named in the accompanying proxy statement to serve for a one-year term expiring at the 2021 annual meeting of the Company’s stockholders. (2) To ratify the appointment of KPMG Huazhen LLP as the Company’s independent audi- tor for 2020. (3) To approve, on an advisory basis, the Company’s named executive officer compensation. (4) To transact such other business as may properly come before the meeting or any adjourn- ment or postponement thereof. P r o x y S t a t e m e n t Who Can Vote: You can vote if you were a stockholder of record as of the close of business on March 17, 2020. Attending the Meeting: How to Vote: Stockholders of record as of the close of business on March 17, 2020 and the general public will be able to attend the Annual Meeting by visiting our Annual Meeting website at www.virtualshareholdermeeting.com/YUMC2020. To participate in the Annual Meeting, you will need the 16-digit control number included on your Notice, on your proxy card or on the instructions that accompanied your proxy materials. The Annual Meeting will begin promptly at 8:00 a.m. Beijing/Hong Kong time on May 8, 2020 / 8:00 p.m. U.S. Eastern time on May 7, 2020. Online check-in will begin 15 minutes prior to the start of the meeting, and you should allow ample time for the online check-in procedures. You may vote over the Internet or via telephone by following the instructions set forth in the accompanying proxy statement. If you received a paper copy of the proxy materials, you may also vote by completing, signing, dating and returning the proxy card. If you attend the Annual Meeting using your 16-digit control number, you may vote during the Annual Meeting. Your vote is important. Whether or not you plan to attend the Annual Meeting, please vote promptly. Date of Mailing: This notice of annual meeting, the accompanying proxy statement and the form of proxy are first being mailed to stockholders on or about March 27, 2020. By Order of the Board of Directors, Joseph Chan Chief Legal Officer PROXY STATEMENT – TABLE OF CONTENTS PROXY STATEMENT SUMMARY QUESTIONS AND ANSWERS ABOUT THE MEETING AND VOTING GOVERNANCE OF THE COMPANY 1 5 11 Governance Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Board Composition and Director Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Board Meetings and Director Attendance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Selection of Director Nominees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Director Qualifications and Skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Diversity of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Stockholder Nominations for Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Board Leadership Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Governance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Risk Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Management Development and Succession Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Stockholder Communications and Engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Policies Regarding Accounting and Auditing Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Committees of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Related Person Transactions Policies and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Director and Executive Officer Stock Ownership Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Policy Regarding Hedging and Speculative Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 P r o x y S t a t e m e n t MATTERS REQUIRING STOCKHOLDER ACTION 24 ITEM 1 Election of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ITEM 2 Ratification of Independent Auditor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ITEM 3 Advisory Vote on Named Executive Officer Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 STOCK OWNERSHIP INFORMATION EXECUTIVE COMPENSATION 33 35 Named Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2019 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Alignment of Executive Compensation Program with Business Performance . . . . . . . . . . . . . . . . . . 37 Recent Compensation Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Pay Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Executive Compensation Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Stockholder Engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Elements of the Executive Compensation Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 2019 Named Executive Officer Compensation and Performance Summary . . . . . . . . . . . . . . . . . . . 48 2020 Special Long-Term Performance-Based Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 How Compensation Decisions Are Made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Compensation Policies and Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Compensation Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Executive Compensation Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Pay Ratio Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 2019 DIRECTOR COMPENSATION EQUITY COMPENSATION PLAN INFORMATION t n e m e t a t S y x o r P AUDIT COMMITTEE REPORT ADDITIONAL INFORMATION 69 71 72 75 PROXY STATEMENT SUMMARY This summary highlights information contained elsewhere in this proxy statement. This summary does not contain all of the information that you should consider, and you should read the entire proxy statement carefully before voting. MEETING INFORMATION Time and Date: 8:00 a.m. Beijing/Hong Kong time on Friday, May 8, 2020 / 8:00 p.m. U.S. Eastern time on Thursday, May 7, 2020 Location: Online at www.virtualshareholdermeeting.com/YUMC2020 Record Date: March 17, 2020 HOW TO VOTE Stockholders of record as of the close of business on March 17, 2020 may vote by using any of the following methods: 2020. Proxies submitted by mail must be received prior to the meeting. Before the Annual Meeting: During the Annual Meeting: • Via Internet by following the instructions on www.proxyvote.com; • Via telephone by calling 1 (800) 690-6903 (toll-free in the U.S.) and following the instructions provided by the recorded message; or • Via mail, if you received your proxy materials by mail, by completing, signing, dating and mailing the proxy card in the postage-paid envelope provided. Proxies submitted through the Internet or by telephone as described above must be received by 11:59 p.m. Beijing/ Hong Kong time / 11:59 a.m. U.S. Eastern time on May 7, ITEMS OF BUSINESS Proposal during • Vote online during the Annual Meeting. You may through vote www.virtualshareholdermeeting.com/YUMC2020 using your 16-digit control number. the Annual Meeting Even if you plan to attend the Annual Meeting, we encourage you to vote your shares by proxy. You may still vote your shares during the Annual Meeting even if you have previously voted by proxy. If you hold your shares in the name of a bank, broker or other nominee, your ability to vote depends on their voting processes. Please follow the directions of your bank, bro- ker or other nominee carefully. Board Voting Recommendation Page Reference 1. Election of the 11 Director Nominees Named in this Proxy Statement to Serve for a One-Year Term FOR each nominee 2. Ratification of the Appointment of KPMG Huazhen LLP as the Company’s Independent Auditor for 2020 3. Advisory Vote on Named Executive Officer Compensation FOR FOR 24 30 32 YUM CHINA – 2020 Proxy Statement 1 P r o x y S t a t e m e n t PROXY STATEMENT SUMMARY COMPANY OVERVIEW Yum China Holdings, Inc., a Delaware corporation (the “Company,” “we,” “us” or “our”) is the largest restaurant company in China in terms of system sales, with $8.8 billion of revenues and 9,200 restaurants as of year-end 2019. Our growing restaurant base consists of our flagship KFC and Pizza Hut brands, as well as emerg- ing brands such as Little Sheep, COFFii & JOY, East Dawning and Taco Bell. 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, Taiwan and Macau), and own the intellectual property of the Little Sheep, COFFii & JOY and East Dawning concepts out- right. SUMMARY INFORMATION REGARDING NOMINEES The following table provides summary information about each of the nominees to our board of directors (the “Board of Directors” or the “Board”). t n e m e t a t S y x o r P Name Director Since Age Fred Hu (Chairman) . . . . . . . 56 2016 Joey Wat . . . . . . . . . . . . . . . . 48 2017 Peter A. Bassi . . . . . . . . . . . . 70 2016 Christian L. Campbell . . . . . 69 2016 Ed Yiu-Cheong Chan . . . . . . 57 2016 Edouard Ettedgui . . . . . . . . . 68 2016 Cyril Han . . . . . . . . . . . . . . . . 42 2019 Louis T. Hsieh . . . . . . . . . . . . 55 2016 Primary Occupation Chairman and founder of Primavera Capital Group Chief Executive Officer of the Company Former Chairman of Yum! Restaurants International Owner of Christian L. Campbell Consulting LLC Operating Partner for SoftBank Investment Advisers Non-Executive Chairman of Alliance Française, Hong Kong Vice President of Ant Financial Services Group Former Chief Financial Officer of NIO Inc. Ruby Lu . . . . . . . . . . . . . . . . . 49 2016 Venture capitalist Zili Shao . . . . . . . . . . . . . . . . . 60 2016 William Wang . . . . . . . . . . . . 45 2017 Non-executive Chairman of Fangda Partners Partner of Primavera Capital Group Board Committee Membership as of March 27, 2020 Independent ✓ A C F* G CC ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ X X CC X X X X X X X X CC X CC X A – Audit Committee; C – Compensation Committee; G – Nominating and Governance Committee; F – Food Safety Committee; CC – Committee Chair * Micky Pant is a member of the Food Safety Committee, but will not stand for re-election to the Board at the Annual Meeting. 2 YUM CHINA – 2020 Proxy Statement PROXY STATEMENT SUMMARY GOVERNANCE HIGHLIGHTS The Board believes that good corporate governance is a critical factor in achieving business success and in fulfilling the Board’s responsibilities to stockholders. The Board believes that its principles and practices align management and stockholder interests. Highlights include: Director Independence • Independent Board Chairman • 10 of 11 director nominees are independent Director Elections and Attendance • Annual election of all directors • Majority voting policy for elections of directors in uncontested elections • Proxy access for director nominees by stockholders • 95% director attendance at Board and committee meetings in 2019 Board Refreshment and Diversity • Directors with experience, qualifications and skills across a wide range of public and pri- vate companies • Directors reflect a diversity of gender, race and ethnicity • Average director nominee age of 56 as of March 27, 2020 • Independent and non-management directors may generally not stand for re-election after age 75 Other Governance Practices • Active stockholder engagement • No shareholder rights plan (also known as a poison pill) • Director and executive officer stock ownership policies P r o x y S t a t e m e n t • Policy prohibiting hedging or other speculative trading of Company stock • Policy regarding resignation if any director experiences a significant change in profes- sional roles and responsibilities • Board access to senior management and independent advisors YUM CHINA – 2020 Proxy Statement 3 PROXY STATEMENT SUMMARY WHERE YOU CAN FIND ADDITIONAL INFORMATION is located Investor Relations website at Our ir.yumchina.com. Although the information contained on or connected to our website is not part of this proxy state- ment, you can view additional information on our web- site, such as our 2019 annual report, the charters of our Board committees, our Corporate Governance Principles, our Code of Conduct and reports that we file with the Securities and Exchange Commission (the “SEC”). Cop- ies of these documents may also be obtained free of charge by writing Yum China Holdings, Inc., 7100 Cor- porate Drive, Plano, Texas 75024, or Yum China Hold- ings, Inc., Yum China Building, 20 Tian Yao Qiao Road, Shanghai 200030 People’s Republic of China, Attention: Corporate Secretary. t n e m e t a t S y x o r P 4 YUM CHINA – 2020 Proxy Statement QUESTIONS AND ANSWERS ABOUT THE MEETING AND VOTING The Board of Directors of Yum China Holdings, Inc. solicits the enclosed proxy for use at the Annual Meeting to be held at 8:00 a.m. Beijing/Hong Kong time on Friday, May 8, 2020 / 8:00 p.m. U.S. Eastern time on Thursday, May 7, 2020. This year, the Annual Meeting will be held through a live audio in a virtual-only format, webcast. The meeting will only be conducted via webcast; there will be no physical meeting location. This proxy statement contains information about the matters to be voted on at the Annual Meeting and the voting process, as well as information about our directors and most highly paid executive officers. What is the purpose of the Annual Meeting? P r o x y S t a t e m e n t At the Annual Meeting, stockholders will vote on several important Company matters. In addition, our manage- ment will report on the Company’s performance over the last fiscal year and, following the meeting, respond to questions from stockholders. Why am I receiving these materials? You received these materials because our Board of Direc- tors is soliciting your proxy to vote your shares at the Annual Meeting. As a stockholder of record as of the close of business on March 17, 2020, you are invited to attend the Annual Meeting and are entitled to vote on the items of business described in this proxy statement. Why did I receive a one-page notice in the mail regarding the Internet availability of proxy materials instead of a full set of proxy materials? As permitted by SEC rules, we are making this proxy statement and our 2019 annual report available to our stockholders electronically via the Internet. On or about March 27, 2020, we mailed to our stockholders the Notice containing instructions on how to access this proxy state- ment and our 2019 annual report and vote online. If you received a Notice by mail, you will not receive a printed copy of the proxy materials unless you request a copy. The Notice contains instructions on how to access and review all of the important information contained in the proxy statement and the annual report. The Notice also instructs you on how you may submit your proxy over the Internet. If you received a Notice by mail and would like to receive a printed copy of our proxy materials, you should follow the instructions for requesting such materi- als contained on the Notice. We encourage you to take advantage of the availability of the proxy materials on the Internet in order to help lower the costs of delivery and reduce the Company’s environ- mental impact. YUM CHINA – 2020 Proxy Statement 5 QUESTIONS AND ANSWERS ABOUT THE MEETING AND VOTING Why is the Annual Meeting a virtual meeting this year? In light of public health concerns regarding the novel coronavirus (COVID-19) outbreak and related travel restrictions, the Board of Directors has determined that it is prudent to hold the Annual Meeting in a virtual-only format, conducted via live audio webcast. The Board of Directors has been monitoring the impact of the COVID-19 outbreak, including with regard to the health and well-being of our employees and stockholders, as well as the related government-imposed restrictions on travel. Hosting the Annual Meeting in virtual-only format protects our employees and stockholders during this time. It provides easy access for stockholders and facilitates participation without the need to travel, since stockholders can participate from any location around the world. How do I attend the Annual Meeting? The Annual Meeting will be held in a virtual-only format, through a live audio webcast. The Annual Meeting will only be conducted via webcast; there will be no physical meeting location. Stockholders of record as of the close of business on March 17, 2020 and the general public will be able to attend the Annual Meeting by visiting our Annual Meeting website at www.virtualshareholdermeeting.com/ YUMC2020. To participate in the Annual Meeting, you will need the 16-digit control number included on your Notice, on your proxy card or on the instructions that accompanied your proxy materials. t n e m e t a t S y x o r P The Annual Meeting will begin promptly at 8:00 a.m. Beijing/Hong Kong time on May 8, 2020 / 8:00 p.m. U.S. Eastern time on May 7, 2020. Online check-in will begin 15 minutes prior to the start of the meeting, and you should allow ample time for the online check-in proce- dures. We encourage our stockholders to access the meet- ing prior to the start time. May stockholders ask questions? Yes. Stockholders will have the ability to submit ques- tions during the Annual Meeting via the Annual Meeting website. As part of the Annual Meeting, we will hold a live Q&A session, during which we intend to answer all questions submitted during the meeting in accordance with the Annual Meeting’s Rules of Conduct which are pertinent to the Company and the meeting matters, as time permits. What if I have technical difficulties or trouble accessing the Annual Meeting? Beginning 30 minutes prior to the start of and during the Annual Meeting, you may contact 1 (800) 586-1548 (U.S.) or 1 (303) 562-9288 (International) for technical assistance. Who may vote? You may vote if you owned any shares of Company com- mon stock as of the close of business on the record date, March 17, 2020. Each share of Company common stock is entitled to one vote. As of March 17, 2020, there were 376,101,276 shares of Company common stock out- standing. 6 YUM CHINA – 2020 Proxy Statement QUESTIONS AND ANSWERS ABOUT THE MEETING AND VOTING What am I voting on? You will be voting on the following three items of busi- ness at the Annual Meeting: • The approval, on an advisory basis, of the Company’s named executive officer compensation. • The election of the 11 director nominees named in this proxy statement to serve for a one-year term; We will also consider other business that properly comes before the meeting. • The ratification of the appointment of KPMG Huaz- hen LLP as the Company’s independent auditor for 2020; and How does the Board of Directors recommend that I vote? Our Board of Directors recommends that you vote your shares: • FOR the ratification of the appointment of KPMG Huazhen LLP as our independent auditor for 2020; and • FOR each of the 11 nominees named in this proxy • FOR the proposal on named executive officer compen- statement for election to the Board; sation. How do I vote before the Annual Meeting? There are three ways to vote before the meeting: • By Internet—we encourage you to vote online at www.proxyvote.com by following instructions on the Notice or proxy card; • By telephone—you may vote by making a telephone call to 1 (800) 690-6903 (toll-free in the U.S.); or • By mail—if you received your proxy materials by mail, you may vote by completing, signing, dating and mail- ing the proxy card in the postage-paid envelope pro- vided. Proxies submitted through the Internet or by telephone as described above must be received by 11:59 p.m. Beijing/ Hong Kong time / 11:59 a.m. U.S. Eastern time on May 7, 2020. Proxies submitted by mail must be received prior to the meeting. If you hold your shares in the name of a bank, broker or other nominee, your ability to vote before the Annual Meeting depends on their voting processes. Please follow the directions of your bank, broker or other nominee carefully. Can I vote during the Annual Meeting? P r o x y S t a t e m e n t Yes. To vote during the Annual Meeting, you will need the 16-digit control number included on your Notice, on your proxy card, or on the instructions that accompanied your proxy materials. Even if you plan to attend the Annual Meeting, we encourage you to vote your shares by proxy. You may still vote your shares during the Annual Meeting even if you have previously voted by proxy. If you hold your shares in the name of a bank, broker or other nominee, your ability to vote during the Annual Meeting depends on their voting processes. Please follow the directions of your bank, broker or other nominee carefully. YUM CHINA – 2020 Proxy Statement 7 QUESTIONS AND ANSWERS ABOUT THE MEETING AND VOTING Can I change my mind after I vote? You may change your vote at any time before the polls close at the Annual Meeting. You may do this by: • giving written notice to the Corporate Secretary of the Company prior to the Annual Meeting; or • signing another proxy card with a later date and return- • voting again during the Annual Meeting. ing it to us for receipt prior to the Annual Meeting; • voting again through the Internet or by telephone prior to 11:59 p.m. Beijing/Hong Kong time / 11:59 a.m. U.S. Eastern time on May 7, 2020; If you hold your shares in the name of a bank, broker or other nominee, your ability change your vote depends on their voting processes. Please follow the directions of your bank, broker or other nominee carefully. Who will count the votes? Representatives of Broadridge Financial Solutions will count the votes and will serve as the independent inspector of election. What if I return my proxy card but do not provide voting instructions? t n e m e t a t S y x o r P If you vote by proxy card, your shares will be voted as you instruct by the individuals named on the proxy card. If you sign and return a proxy card but do not specify how your shares are to be voted, the persons named as proxies on the proxy card will vote your shares in accordance with the recommendations of the Board set forth on page 1. What does it mean if I receive more than one Notice or proxy card? If you received more than one Notice or proxy card, it means that you have multiple accounts with brokers and/ or our transfer agent. Please vote all of these shares. We recommend that you contact your broker and/or our transfer agent to consolidate as many accounts as possible under the same name and address. Our transfer agent is American Stock Transfer and Trust Company, LLC, which may be reached at 1 (888) 439-4986. Will my shares be voted if I do not provide my proxy? Your shares may be voted on certain matters if they are held in the name of a brokerage firm, even if you do not provide the brokerage firm with voting instructions. Bro- kerage firms have the authority under the New York Stock Exchange (“NYSE”) rules to vote shares for which their customers do not provide voting instructions on cer- tain “routine” matters. 8 YUM CHINA – 2020 Proxy Statement QUESTIONS AND ANSWERS ABOUT THE MEETING AND VOTING The proposal to ratify the appointment of KPMG Huaz- hen LLP as our independent auditor for 2020 is consid- ered a routine matter for which brokerage firms may vote shares for which they have not received voting instruc- tions. The other matters to be voted on at our Annual Meeting are not considered “routine” under applicable rules. When a matter is not a routine matter and the bro- kerage firm has not received voting instructions from the beneficial owner of the shares with respect to that matter, the brokerage firm cannot vote the shares on that proposal. This is called a “broker non-vote.” How many votes must be present to hold the Annual Meeting? Your shares are counted as present at the Annual Meeting if you attend the Annual Meeting via webcast using your 16-digit control number or if you properly submit a proxy by Internet, telephone or mail. In order for us to conduct our Annual Meeting, a majority of the shares of Company common stock outstanding as of March 17, 2020 must be present via webcast or represented by proxy at the Annual Meeting. This is referred to as a “quorum.” Abstentions and broker non-votes will be counted for purposes of establishing a quorum at the Annual Meeting. How many votes are needed to elect directors? You may vote “FOR” each nominee or “AGAINST” each nominee, or “ABSTAIN” from voting on one or more nominees. Unless you mark “AGAINST” or “ABSTAIN” with respect to a particular nominee or nominees or for all nominees, your proxy will be voted “FOR” each of the director nominees named in this proxy statement. In an uncontested election, a nominee will be elected as a director if the number of “FOR” votes exceeds 50% of the number of votes cast with respect to that director’s election. Abstentions will be counted as present but not voted. Abstentions and broker non-votes will not affect the outcome of the election of directors. Full details of the Company’s majority voting policy are set out in our Corporate Governance Principles and are described under “Governance of the Company— Majority Voting Policy.” P r o x y S t a t e m e n t How many votes are needed to approve the other proposals? Proposals 2 and 3 must receive the “FOR” vote of a majority of the shares, present via webcast or represented by proxy, and entitled to vote at the Annual Meeting. For each of these proposals, you may vote “FOR,” “AGAINST” or “ABSTAIN.” Abstentions will be counted as shares present and entitled to vote at the Annual Meeting. Accordingly, abstentions will have the same effect as a vote “AGAINST” Proposals 2 and 3. Broker non-votes will not be counted as shares present and entitled to vote with respect to the particular matter on which the broker has not voted. Thus, broker non-votes will not affect the outcome of either of these proposals. When will the Company announce the voting results? The Company will announce the voting results of the Annual Meeting on a Current Report on Form 8-K filed with the SEC within four business days of the Annual Meeting. YUM CHINA – 2020 Proxy Statement 9 QUESTIONS AND ANSWERS ABOUT THE MEETING AND VOTING What if other matters are presented for consideration at the Annual Meeting? The Company knows of no other matters to be submitted to the stockholders at the Annual Meeting, other than the proposals referred to in this proxy statement. If any other matters properly come before the stockholders at the Annual Meeting, it is the intention of the persons named on the proxy to vote the shares represented thereby on such matters in accordance with their best judgment. t n e m e t a t S y x o r P 10 YUM CHINA – 2020 Proxy Statement GOVERNANCE OF THE COMPANY The business and affairs of the Company are managed under the direction of the Board of Directors. The Board believes that good corporate governance is a critical factor in achieving business success and in fulfilling the Board’s responsibilities to stockholders. The Board believes that its practices align management and stockholder interests. The corporate governance section of our website makes available certain of the Company’s corporate governance materials, including our Corporate Governance Princi- ples, the charters for each committee and our Code of Conduct. To access these documents on our Investor Relations website, ir.yumchina.com, click on “Gover- nance” and then “Corporate Governance Documents.” Highlights of our corporate governance policies and practices are described below. Director Independence • Independent Board Chairman Director Elections and Attendance • Annual election of all directors • 10 of 11 director nominees are independent • Majority voting policy for elections of directors in uncontested elections • Proxy access for director nominees by stockholders • 95% director attendance at Board and committee meetings in 2019 P r o x y S t a t e m e n t Board Refreshment and Diversity • Directors with experience, qualifications and skills across a wide range of pub- lic and private companies • Directors reflect a diversity of gender, race and ethnicity • Average director nominee age of 56 as of March 27, 2020 • Independent and non-management directors may generally not stand for re-election after age 75 Other Governance Practices • Active stockholder engagement • No shareholder rights plan (also known as a poison pill) • Director and executive officer stock ownership policies • Policy prohibiting hedging or other speculative trading of Company stock • Policy regarding resignation if any director experiences a significant change in professional roles and responsibilities • Board access to senior management and independent advisors YUM CHINA – 2020 Proxy Statement 11 GOVERNANCE OF THE COMPANY What is the composition of the Board of Directors and how often are members elected? Our Board of Directors presently consists of 12 directors, 11 of whom are standing for re-election at the Annual Meeting for a one-year term. As discussed in more detail later in this section, the Board has determined that ten of those directors are independent under the rules of the NYSE. How often did the Board meet in 2019? Directors are expected, absent extraordinary circum- stances, to attend all Board meetings and meetings of committees on which they serve. Our Board met 7 times and the committees collectively met 29 times during 2019. In 2019, overall attendance at Board and committee meetings was 95% and all directors attended at least 75% of the aggregate total of meetings of the Board and com- mittees on which the director served. Our independent directors meet privately in executive session without management present at each regularly scheduled Board meeting. Our independent Chairman leads these Board executive sessions. What is the Board’s policy regarding director attendance at the Annual Meeting? All directors are encouraged to attend the Annual Meeting. All incumbent directors attended the 2019 annual meeting of the Company’s stockholders. t n e m e t a t S y x o r P How are director nominees selected? The Nominating and Governance Committee is responsi- ble for recommending director candidates to the full Board for nomination and election at the annual meetings of stockholders. The Nominating and Governance Com- mittee will interview a director candidate before the can- didate is submitted to the full Board for approval. The Nominating and Governance Committee’s charter pro- vides that it may retain a third-party search firm to identify candidates from time to time. The Nominating and Gov- ernance Committee will also consider director candidates recommended by stockholders or other sources in the same manner as nominees identified by the Committee. For a stockholder to submit a candidate for consideration by the Nominating and Governance Committee, a stock- holder must notify the Company’s Corporate Secretary by mail at Yum China Holdings, Inc., 7100 Corporate Drive, Plano, Texas 75024 or at Yum China Holdings, Inc., Yum China Building, 20 Tian Yao Qiao Road, Shanghai 200030, People’s Republic of China. In accordance with the Corporate Governance Principles, our Board seeks members from diverse professional backgrounds who combine a broad spectrum of experi- ence and expertise with a reputation for integrity. Direc- tors should have experience in positions with a high degree of responsibility and be leaders in the companies or institutions with which they are affiliated, and are selected based upon contributions they can make to the Board and management. The Nominating and Gover- nance Committee seeks to complete customary vetting procedures and background checks with respect to indi- viduals suggested for potential Board membership by 12 YUM CHINA – 2020 Proxy Statement GOVERNANCE OF THE COMPANY stockholders of the Company or other sources. We believe that each of our directors and director nominees has met the guidelines set forth in the Corporate Gover- nance Principles. The Company is party to a shareholders agreement with Primavera Capital Group (“Primavera”), and API (Hong Kong) Investment Limited, an affiliate of Zhejiang Ant Small and Micro Financial Services Group Co., Ltd. (“Ant Financial”) pursuant to which Primavera has identified two director designees, Dr. Fred Hu and Mr. William Wang. In addition, Mr. Cyril Han served as the non-voting Board observer designated by Ant Financial since November 2016 and was appointed as a director at the 2019 annual meeting of the Company’s stockholders. What are the directors’ qualifications and skills? As listed below, our directors have experience, qualifica- tions and skills across a wide range of public and private companies spanning many different industries, possess- ing a broad spectrum of experience both individually and collectively. They bring a diverse mix of regional, indus- try and professional expertise to the Company. Director Qualifications and Skills (Number of Directors) Industry Information Technology 6 5 Regional (China/Asia Pacific) Public Company Board 10 11 P r o x y S t a t e m e n t How does the composition of our Board reflect diversity? The Nominating and Governance Committee seeks to recommend nominees that bring a unique perspective to the Board in order to contribute to the collective diversity of the Board. As a part of this process, in connection with director nominations, the Nominating and Governance Committee considers several factors to ensure the entire Board collectively embraces a wide variety of character- istics, including professional background, experience, skills and knowledge. Each director nominee will gener- ally exhibit different and varying degrees of these charac- teristics. With respect to the Company’s current slate of director nominees, the Company also benefits from the diversity inherent from differences in Board member age, gender, race and ethnicity. Can stockholders nominate directors for election to the Board? Yes, under our amended and restated bylaws, stockhold- ers may nominate persons for election as directors at an annual meeting by following the procedures described under “Additional Information.” YUM CHINA – 2020 Proxy Statement 13 GOVERNANCE OF THE COMPANY What is the Board’s leadership structure? Our Board is currently led by an independent Chairman, Dr. Fred Hu. Our Board believes that Board independence and oversight of management are effectively maintained through a strong independent Chairman and through the Board’s composition, committee system and policy of having regular executive sessions of non-management directors, all of which are discussed below this section. Further, separating the Chairman and Chief Executive Officer roles enables the Chairman to focus on corporate governance matters and the Chief Executive Officer to focus on the Company’s business. We find that this struc- ture works well to foster an open dialogue and construc- tive feedback among the independent directors and management. It further allows the Board to effectively represent the best interests of all stockholders and con- tribute to the Company’s long-term success. To promote effective independent oversight, the Board has adopted a number of governance practices discussed below. What are the Company’s governance policies and ethical guidelines? of Conduct also sets forth information and procedures for employees to report ethical or accounting concerns, misconduct or violations of the Code of Conduct in a confidential manner. The Code of Conduct applies to all directors and employees of the Company, including the principal executive officer, the principal financial offi- cer and the principal accounting officer. All employees of the Company are required, on an annual basis, to complete the Yum China Code of Conduct Question- naire and certify in writing that they have read and understand the Code of Conduct. The Code of Conduct is at ir.yumchina.com. The Company intends to post amendments to or waivers from the Code of Conduct (to the extent applicable to directors or executive offi- cers and required by the rules of the SEC or NYSE) on this website. the Company’s website available on t n e m e t a t S y x o r P • Board Committee Charters. The Audit Committee, Compensation Committee, Nominating and Gover- nance Committee and Food Safety Committee of the Board of Directors operate pursuant to their respective written charters. These charters were approved by the Board of Directors and are reviewed annually by the respective committees. Each charter is available on the Company’s website at ir.yumchina.com. • Governance Principles. The Board of Directors has adopted Corporate Governance Principles, which are intended to embody the governance principles and pro- cedures by which the Board functions. These principles are at available on the Company’s website ir.yumchina.com. • Ethical Guidelines. Yum China’s Code of Conduct was adopted to emphasize the Company’s commitment to the highest standards of business conduct. The Code 14 YUM CHINA – 2020 Proxy Statement GOVERNANCE OF THE COMPANY What other significant Board governance practices does the Company have? • Annual Election of Directors. In accordance with our Amended and Restated Certificate of Incorporation, our directors are elected to serve a one-year term and until their successors are elected and qualified or until their earlier death, resignation or removal. • Role of Lead Director. Our Corporate Governance Principles require the independent directors to appoint a Lead Director when the Chairman does not qualify as independent in accordance with the applicable rules of the NYSE. The Company currently does not have a Lead Director because the Chairman of the Board is independent. • Executive independent Sessions. Our and non-management directors meet regularly in executive session. The executive sessions are attended only by the independent and non-management directors and are presided over by the independent Chairman. Our inde- pendent directors also meet in executive session at least once per year. • Board and Committee Evaluations. The Board rec- ognizes that a thorough, constructive evaluation process enhances our Board’s effectiveness and is an essential element of good corporate governance. Each year, the Nominating and Governance Committee oversees the design and implementation of the evaluation process, focused on the Board’s contribution to the Company and on areas in which the Board believes a better con- tribution could be made. In addition, each of the Audit Committee, the Compensation Committee, the Nomi- nating and Governance Committee and the Food Safety Committee also conducts a similar annual self- evaluation pursuant to their respective charters. Written questionnaires completed by each director, as well as discussions with selected directors, solicit feedback on a wide range of issues, including Board/committee com- position and leadership, meetings, responsibilities and overall effectiveness. A summary of the Board and committee evaluation results is discussed with the Board and with the respective committees, and policies P r o x y S t a t e m e n t and practices are updated in response to the evaluation results. Director suggestions for improvements to eval- uation questionnaires and processes are considered for incorporation for the following year. • Retirement Policy. Pursuant to our Corporate Gover- independent or non-management nance Principles, directors may not stand for re-election to the Board after they have reached the age of 75, unless the Board unan- imously elects to have the director stand for re-election. • Limits on Director Service on Other Public Com- pany Boards. Our Corporate Governance Principles provide that directors may serve on no more than four other public company boards. The Company’s Chief Executive Officer, if a director, may serve on no more than two other public company boards. All directors are expected to advise the Chairman and the Chair of the Nominating and Governance Committee prior to accepting any other public company directorship or any assignment to the audit committee or compensation committee of other public company boards. • Majority Voting Policy. Our amended and restated bylaws require majority voting for the election of direc- tors in uncontested elections. This means that director nominees in an uncontested election for directors must receive a number of votes “FOR” their election in excess of 50% of the number of votes cast with respect to that director’s election. The Corporate Governance Principles further provide that any incumbent director who does not receive a majority of “FOR” votes will promptly tender to the Board his or her resignation from the Board. The resignation will specify that it is effec- tive upon the Board’s acceptance of the resignation. The Board will, through a process managed by the Nominating and Governance Committee and excluding the nominee in question, accept or reject the resignation and publicly disclose the Board’s decision regarding the resignation and the rationale behind the decision within 90 days from the date of the certification of the election results. YUM CHINA – 2020 Proxy Statement 15 GOVERNANCE OF THE COMPANY • Access to Management and Employees. Our direc- tors have complete and open access to senior members of management. Our Chief Executive Officer invites key employees of the Company to attend Board ses- sions at which the Chief Executive Officer believes they can meaningfully contribute to Board discussion. • Access to Outside Advisors. The Board and Board committees have the right to consult and retain inde- pendent legal and other advisors at the expense of the Company. The Audit Committee has the sole authority to appoint, determine funding for and replace the inde- pendent auditor. The Compensation Committee has the sole authority to retain any advisor to assist it in the per- formance of its duties, after taking into consideration all factors relevant to the advisor’s independence from management. The Nominating and Governance Com- mittee has the sole authority to retain search firms to be used to identify director candidates. The Food Safety Committee has the authority to consult and retain any advisor to assist it in connection with the exercise of its responsibilities and authority. What is the Board’s role in risk oversight? t n e m e t a t S y x o r P The Board maintains overall responsibility for oversee- ing the Company’s risk management framework. In fur- therance of its responsibility, the Board has delegated specific risk-related responsibilities to the Audit Com- mittee, the Compensation Committee and the Food Safety Committee. Audit Committee The Audit Committee engages in substantive discussions with management regarding the Company’s major risk exposures and the steps management has taken to monitor and control such exposures, including the Company’s risk assessment and risk management policies. Our Head of Corporate Audit reports directly to the Audit Committee, as well as our Chief Financial Officer. The Audit Com- mittee also receives reports at each committee meeting regarding legal and regulatory risks from management and meets periodically in separate executive sessions with our independent auditor and our Head of Corporate Audit. The Chief Legal Officer reports regularly to the Audit Committee on the Company’s key risk areas and compli- ance programs. The Audit Committee periodically pro- vides a summary to the full Board of the risk areas reviewed together with any other risk-related subjects dis- cussed at the Audit Committee meeting. Alternatively, the Board may review and discuss directly with management the major risks arising from the Company’s business and operations. Compensation Committee The Compensation Committee considers the risks that may be implicated by our compensation programs through a risk assessment conducted by management and reports its conclusions to the full Board. This oversight helps ensure the Company’s compensation programs align with the Company’s goals and compensation phi- losophies and, along with other factors, operate to miti- gate against the risk that such programs would encourage excessive or inappropriate risk-taking. Food Safety Committee The Food Safety Committee assists the Board in its over- sight of the Company’s practices, programs, procedures and initiatives relating to food safety. The Food Safety Committee also monitors trends, issues and concerns affecting the Company’s food safety practices, and the risks arising therefrom, in light of the Company’s overall efforts related to food safety. 16 YUM CHINA – 2020 Proxy Statement GOVERNANCE OF THE COMPANY How does the Board oversee food safety risk? The Board and the Food Safety Committee are involved in oversight of the Company’s food safety risk. The Food Safety Committee assists the Board in the oversight of food safety risk and regularly receives reports from man- agement in connection with the Company’s practices, procedures, strategies and initiatives relating to food safety and the risks arising therefrom. The Board and the Food Safety Committee also monitor and evaluate significant changes in regulatory requirements on food safety, material food safety incidents that could poten- tially affect the Company, as well as any severe public health situations, including the COVID-19 outbreak, that could adversely affect the Company’s business and oper- ations. How does the Board oversee cybersecurity risk? The Board and the Audit Committee are involved in over- sight of the Company’s cybersecurity risk. The Audit Committee assists the Board in the oversight of cyberse- curity and other technology risks, discusses with manage- ment cybersecurity risk mitigation and incident management, and reviews management reports regarding the Company’s cybersecurity governance processes, inci- dent response system and applicable cybersecurity laws, regulations and standards, status of projects to strengthen internal cybersecurity, the evolving threat environment, vulnerability assessments, specific cybersecurity inci- dents and management’s efforts to monitor, detect and prevent cybersecurity threats. What is the Board’s role in management development and succession planning? P r o x y S t a t e m e n t The Board considers management development and suc- cession planning to be a critical part of our Company’s long-term strategy. In accordance with our Corporate Governance Principles, the Board reviews the Company’s succession planning, including succession planning in the case of retirement of the Chief Executive Officer of the Company. The Chief Executive Officer periodically reports to the Board with regard to his or her recommen- dations for potential successors to senior executive posi- tions and development plans for such individuals. In addi- tion, the Board reviews recommendations from an independent committee with regard to the performance evaluation of the Chief Executive Officer, which the committee conducts annually, in accordance with its charter. How does the Board determine which directors are considered independent? The Company’s Corporate Governance Principles, adopted by the Board, require that a majority of the direc- tors qualify as independent in accordance with the appli- cable rules of the NYSE. The Board determines on an annual basis whether each director qualifies as indepen- dent pursuant to the applicable rules of the NYSE. YUM CHINA – 2020 Proxy Statement 17 GOVERNANCE OF THE COMPANY Pursuant to the Corporate Governance Principles, the Board undertook its annual review of director indepen- dence. During this review, the Board considered transac- tions and relationships between each director or any member of his or her immediate family and the Company and its subsidiaries and affiliates. As provided in the Cor- porate Governance Principles, the purpose of this review was to determine whether any such relationships or trans- actions were inconsistent with a determination that the director is independent. As a result of the review, the Board affirmatively deter- mined that all of the directors and director nominees are independent of the Company and its management under NYSE rules, with the exception of Micky Pant and Joey Wat. Mr. Pant, who is not standing for re-election at the Annual Meeting, is not considered an independent director because he formerly served as Senior Advisor to the Company and as Chief Executive Officer of the Com- pany. Ms. Wat is not considered an independent director because she is the current Chief Executive Officer of the Company. In reaching this conclusion, the Board determined that Dr. Hu, Messrs. Bassi, Campbell, Chan, Ettedgui, Han, Hsieh, Shao and Wang and Ms. Lu had no material rela- tionship with the Company other than their relationship as a director. In addition, the Board previously determined that Mr. Jonathan Linen, who served as a director during 2019, was an independent director. How do stockholders communicate with the Board? t n e m e t a t S y x o r P Stockholders or other parties who wish to communicate directly with the non-management directors, individually or as a group, or the entire Board may do so by writing to the Nominating and Governance Committee, c/o the Cor- porate Secretary, Yum China Holdings, Inc., 7100 Cor- porate Drive, Plano, Texas, 75024. The Nominating and Governance Committee of the Board has approved a pro- cess for handling correspondence received by the Com- pany and addressed to non-management members of the Board or the entire Board. Under that process, the Corpo- rate Secretary of the Company reviews all such corre- spondence and regularly forwards to a designated member of the Nominating and Governance Committee copies of all such correspondence (except commercial correspondence and correspondence that is duplicative in nature) and a summary of all such correspondence. Direc- tors may at any time review a log of all correspondence received by the Company that is addressed to members of the Board and request copies of any such correspondence. Written correspondence from stockholders relating to internal controls or auditing matters are accounting, brought to the attention of the Chairperson of the Audit Committee and to the internal audit department and are handled in accordance with procedures established by the Audit Committee with respect to such matters (described below). Correspondence from stockholders relating to Compensation Committee matters are referred to the Chairperson of the Compensation Committee. How do the Board and management engage with stockholders? Our Board and management are committed to regular engagement with our stockholders. In 2019, we reached out to our top 25 stockholders and other selected stock- holders, which comprise holders of more than 50% of the outstanding shares of Company common stock, in order to solicit their input on important governance, executive compensation, sustainability and other matters. For more information on stockholder engagement regarding com- pensation for executive officers, please see “ Executive Compensation—Stockholder Engagement”. Addition- ally, our senior management team, including our Chief Executive Officer and Chief Financial Officer, regularly engage in meaningful dialogue with our stockholders, including through our quarterly earnings calls and inves- tor conferences and meetings. Our senior management team regularly reports to our Board and, as applicable, committees of our Board, regarding stockholder views. 18 YUM CHINA – 2020 Proxy Statement GOVERNANCE OF THE COMPANY We evaluate and respond to the views voiced by our stock- holders. As a result of our stockholder engagement process in recent years, we have expanded our disclosures on the Board’s role in risk oversight and further development of our compensation program in this proxy statement. What are the Company’s policies on reporting of concerns regarding accounting and auditing matters? The Audit Committee has established policies on reporting concerns regarding accounting and auditing matters in addition to our policy on communicating with our non-management directors. Any employee may, on a con- fidential or anonymous basis, submit complaints or con- cerns regarding accounting or auditing matters to the Chief Legal Officer of the Company through the Company’s Employee Hotline or by e-mail or regular mail. If an employee is uncomfortable for any reason contacting the Chief Legal Officer, the employee may contact the Chair- person of the Audit Committee. The Chief Legal Officer maintains a log of all complaints or concerns, tracking their receipt, investigation and resolution and prepares a periodic summary report thereof for the Audit Committee. P r o x y S t a t e m e n t YUM CHINA – 2020 Proxy Statement 19 GOVERNANCE OF THE COMPANY What are the Committees of the Board? The Board of Directors has standing Audit, Compensation, Nominating and Governance and Food Safety Committees. Set forth below is a summary of the functions of each committee, the members of each committee as of March 27, 2020 and the number of meetings each committee held in 2019. Audit Committee • Possesses sole authority regarding the selection and retention of the independent Christian L. Campbell, Chair Peter A. Bassi Ed Yiu-Cheong Chan Cyril Han Louis T. Hsieh Number of meetings held in 2019: 8 t n e m e t a t S y x o r P auditor • Reviews and has oversight over the Company’s internal audit function • Reviews and approves all auditing services, internal control-related services and per- mitted non-audit services to be performed for the Company by the independent audi- tor • Reviews the independence, qualification and performance of the independent auditor • Reviews and discusses with management and the independent auditor any major issues as to the adequacy of the Company’s internal controls, any special steps adopted in light of material control deficiencies and the adequacy of disclosures about changes in internal control over financial reporting • Reviews and discusses with management and the independent auditor the annual audited financial statements, results of the review of the Company’s quarterly finan- cial statements and significant financial reporting issues and judgments made in con- nection with the preparation of the Company’s financial statements • Review and discuss with the independent auditor any critical audit matter (“CAM”) addressed in the audit of the Company’s financial statements and the relevant finan- cial statement accounts and disclosures that relate to each CAM. • Reviews the Company’s accounting and financial reporting principles and practices, including any significant changes thereto • Advises the Board with respect to Company policies and procedures regarding com- pliance with applicable laws and regulations and with the Company’s Code of Con- duct • Discusses with management the Company’s major risk exposures and the steps man- agement has taken to monitor and control such exposures; and assists the Board in the oversight of cybersecurity and other technology risks. Further detail about the role of the Audit Committee in risk assessment and risk management is included in the sec- tion entitled “What is the Board’s role in risk oversight?” and “How does the Board oversee cybersecurity risk?” The Board of Directors has determined that all of the members of the Audit Committee are independent within the meaning of applicable SEC regulations and the listing standards of the NYSE. The Board has also determined that each member of the Audit Committee is financially literate within the meaning of the listing standards of the NYSE and that each of Messrs. Bassi, Chan, Han and Hsieh is qualified as an audit committee financial expert within the meaning of SEC regulations. The Board appointed Mr. Campbell as a member of the Audit Committee and its chair effective after the Company’s 2019 annual meeting of stockholders. Prior to founding his global corporate governance and compliance consulting business in 2016, Mr. Campbell served as general counsel of three U.S. public companies: Yum! Brands, Inc. (“YUM”), Owens Corning and Nalco Chemical Company. In addition, Mr. Campbell was a founding director of Restaurant Supply Chain Solutions, Inc., a purchasing cooperative for YUM’s U.S. franchising partners. The Board believes that our stock- holders’ interests are best served by appointing Mr. Campbell as the chairman of the Audit Committee, considering his 20 YUM CHINA – 2020 Proxy Statement GOVERNANCE OF THE COMPANY significant experience advising the boards of U.S. public companies, deep U.S. corporate governance, corporate compli- ance and risk management expertise, which are all particularly valuable to the Company — a Delaware incorporated, NYSE-traded, SEC-reporting company operating almost exclusively in China, as well as his familiarity with the Com- pany’s operations. Mr. Campbell’s skill set makes him uniquely qualified to serve in this role. The Board has determined that Mr. Campbell is independent within the meaning of applicable SEC regulations and the listing standards of the NYSE. Compensation Committee Ruby Lu, Chair Christian L. Campbell Edouard Ettedgui William Wang Number of meetings held in 2019: 15 • Oversees the Company’s executive compensation plans and programs and reviews and recommends changes to these plans and programs • Monitors the performance of the Chief Executive Officer and other senior executives in light of corporate goals set by the Committee • Reviews and approves the corporate goals and objectives relevant to the Chief Executive Officer’s and other senior executives’ compensation and evaluates their performance in light of those goals and objectives • Determines and approves the compensation level of the Chief Executive Officer and other senior executive officers based on this evaluation • Reviews the Company’s compensation plans, policies and programs to assess the extent to which they encourage excessive or inappropriate risk-taking or earnings manipulation The Board has determined that all of the members of the Compensation Committee are independent within the meaning of the listing standards of the NYSE. Nominating and Governance Committee Fred Hu, Chair Christian L. Campbell Edouard Ettedgui Ruby Lu Number of meetings held in 2019: 4 • Identifies and proposes to the Board individuals qualified to become Board members and recommends to the Board director nominees for each committee • Advises the Board on matters of corporate governance • Reviews and reassesses from time to time the adequacy of the Company’s Corporate Governance Principles and recommends any proposed changes to the Board for approval • Receives comments from all directors and reports annually to the Board with assessment of the Board’s performance • Reviews annually and makes recommendations to the Board with respect to the com- pensation and benefits of directors • Reviews management succession planning and makes recommendations to the Board • Review emerging corporate governance issues and best practices P r o x y S t a t e m e n t The Board has determined that all of the members of the Nominating and Governance Committee are independent within the meaning of the listing standards of the NYSE. Food Safety Committee Zili Shao, Chair Micky Pant Peter A. Bassi Edouard Ettedgui Number of meetings held in 2019: 2 • Reviews, evaluates and advises the Board regarding the practices, procedures, strategies and initiatives to protect food safety • Reviews, evaluates and advises the Board regarding trends, issues and concerns which affect or could affect the Company’s food safety practices, and the risks arising there- from, in light of the Company’s overall efforts related to food safety • Reviews and evaluates any corrective action taken by management to address any food safety related risks or incident, if any, and advises the Board regarding any proposed action in relation thereto YUM CHINA – 2020 Proxy Statement 21 GOVERNANCE OF THE COMPANY What are the Company’s policies and procedures with respect to related person transactions? Under the Company’s Related Person Transaction Poli- cies and Procedures, the Audit Committee reviews the material facts of all related person transactions that require the Audit Committee’s approval and either approves or disapproves of the entry into the related person transac- tion. In determining whether to approve or ratify a related person transaction, the Audit Committee will determine whether such transaction is in, or not opposed to, the best interest of the Company and will take into account, among other factors it deems appropriate, whether such transac- tion is on terms no less favorable to the Company than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related person’s interest in the transaction. Transac- tions, arrangements or relationships or any series of simi- lar transactions, arrangements or relationships in which (i) a related person has or will have a direct or indirect material interest, (ii) the Company is a participant and (iii) that exceed $120,000 in any calendar year are subject to the Audit Committee’s review. Any director who is a related person with respect to a transaction under review may not participate in any discussion or approval of the transaction, except that the director will provide all mate- rial information concerning the transaction to the Audit Committee. t n e m e t a t S y x o r P Related persons are directors, director nominees, execu- tive officers, beneficial owners of 5% or more of the out- standing shares of Company common stock and their immediate family members. An immediate family mem- ber includes a person’s children, stepchildren, parents, stepparents, spouse, siblings, mothers- and fathers-in-law, and sons- sisters-in-law and anyone sharing such person’s house- hold (other than a tenant or employee). daughters-in-law, brothers- and and After its review, the Audit Committee may approve or ratify the transaction. The policies and procedures provide that certain transactions are deemed to be pre-approved even if they will exceed $120,000. These transactions include employment of executive officers, director com- pensation and transactions with other companies if the aggregate amount of the transaction does not exceed the greater of $1 million or 2% of that company’s total con- solidated gross revenues and the related person is not an executive officer of the other company. There were no transactions considered to be a related per- son transaction from January 1, 2019 through the date of this proxy statement. Does the Company require stock ownership by directors? The Board believes that the number of shares of Company common stock owned by each director is a personal deci- sion. However, the Board strongly supports the position that directors should own a meaningful number of shares of Company common stock and expects that a director will not sell any shares received as director compensation until at least 12 months following the director’s retirement or departure from the Board. The Company’s non-employee directors receive a signif- icant portion of their annual compensation in shares of Company common stock. The Company believes that the emphasis on the equity component of director compensa- tion serves to further align the interests of directors with those of our stockholders. 22 YUM CHINA – 2020 Proxy Statement GOVERNANCE OF THE COMPANY Does the Company require stock ownership by executive officers? The Board has adopted Stock Ownership Guidelines, which require executive officers to own a substantial amount of Company common stock in order to promote an ownership mentality among management and align their interests with those of stockholders. See “Executive Compensation—Compensation Policies and Practices— Stock Ownership Guidelines” for more information. How many shares of Company common stock do the directors and executive officers own? Stock ownership information for our directors and executive officers is shown under “Stock Ownership Information.” Does the Company have a policy on hedging or other speculative trading in Company common stock? Directors, executive officers and certain other designated employees are prohibited from speculative trading in Company common stock, including trading in puts, calls or other hedging or monetization transactions. P r o x y S t a t e m e n t How are directors compensated? Employee directors do not receive additional compensation for serving on the Board of Directors. The annual compen- sation for each director who is not an employee of the Company is discussed under “2019 Director Compensation.” YUM CHINA – 2020 Proxy Statement 23 MATTERS REQUIRING STOCKHOLDER ACTION ITEM 1. Election of Directors Who are the director nominees? Each of the director nominees currently serves as a direc- tor of the Company. Each nominee has been nominated by the Board for election at the Annual Meeting to hold office for a one-year term. If elected, the nominees will hold office until the 2021 annual meeting of the Compa- ny’s stockholders and until their respective successors have been duly elected and qualified or until their earlier death, resignation or removal. Micky Pant will not stand for re-election to the Board at the Annual Meeting. The Company thanks Mr. Pant for his service on the Board. At the Annual Meeting, proxies cannot be voted for a greater number of individuals than the 11 nominees named in this proxy statement. t n e m e t a t S y x o r P The biographies of each of the nominees below contain information regarding the person’s service as a director, business experience, director positions held currently or at any time during the last five years, information regarding involvement administrative proceedings, if applicable, and the experiences, qualifica- tions, attributes or skills that caused the Nominating and Governance Committee and the Board to determine that the person should serve as a director for the Company. In addition to the information presented below regarding certain legal or in each nominee’s specific experience, qualifications, attrib- utes and skills that led our Board to the conclusion that he or she should serve as a director, we also believe that all of our director nominees have a reputation for integrity, hon- esty and adherence to high ethical standards. They each have demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of ser- vice to the Company and our Board. There are no family relationships among any of the direc- tors, director nominees and executive officers of the Company. Ages are as of March 27, 2020. What if a nominee is unwilling or unable to serve? That is not expected to occur. If it does, proxies may be voted for a substitute nominated by the Board of Direc- tors. What vote is required to elect directors? A nominee will be elected as a director if the number of “FOR” votes exceeds the number of “AGAINST” votes with respect to his or her election. The Board of Directors recommends that you vote FOR the election of the 11 director nominees. 24 YUM CHINA – 2020 Proxy Statement MATTERS REQUIRING STOCKHOLDER ACTION Director Nominees Fred Hu Age 56 Director Since 2016 Fred Hu is Chairman and founder of Primavera, a leading China-based investment firm. Dr. Hu has served as Chairman of Primavera since its inception in 2010. Prior to Primavera, Dr. Hu served in various roles at Goldman Sachs from 1997 to 2010, including serving as partner and Chairman of Greater China at Goldman Sachs Group, Inc. From 1991 to 1996, Dr. Hu served as an economist at the International Monetary Fund (IMF) in Washington D.C., where he engaged in mac- roeconomic research, policy consultations and technical assistance for member country governments including China. Dr. Hu currently is a member of the board of directors of Hong Kong Exchanges and Clearing Limited, Industrial and Commercial Bank of China Limited, and UBS AG and UBS Group AG. Dr. Hu also serves as a co-director of the National Center for Economic Research and professor at Tsinghua University, and he is also an adjunct professor at the Chinese University of Hong Kong and Peking University. In addition, Dr. Hu is a member of the Council of Foreign Relations’ Global Advisory Board, a member of Harvard University’s Global Advisory Council, and a member of the Advisory Committees of several institutions including the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School and the Jerome A. Chazen Institute of International Business at Columbia University. He is the author of several books and other publications in the areas of economics and finance and on China and Asian economies. Dr. Hu has advised the Chinese government on financial and pension reform, state-owned enterprise (SOE) restructuring and macroeconomic policies. Dr. Hu is a trustee of China Medical Board and the Co-Chairman of the Nature Conserva- tory’s Asia Pacific Council. Dr. Hu brings to our Board extensive expertise in international affairs and the Chinese econ- omy. In addition, Dr. Hu brings valuable business, strategic development and corporate leadership experience as well as expertise in economics, finance and global capital markets. P r o x y S t a t e m e n t Joey Wat Age 48 Director Since 2017 Joey Wat has served as the Chief Executive Officer of the Company since March 2018. Ms. Wat served as President and Chief Operating Officer of Yum China 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 strat- egy positions at AS Watson of Hutchison 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 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 brings to our Board extensive knowledge of the Company’s business and her industry acumen acquired in the course of a career that included several leadership roles in retail companies. YUM CHINA – 2020 Proxy Statement 25 MATTERS REQUIRING STOCKHOLDER ACTION Peter A. Bassi Age 70 Director Since 2016 t n e m e t a t S y x o r P Peter A. Bassi served as Chairman of Yum! Restaurants International (“YRI”) from 2003 to 2005 and as its President from 1997 to 2003. Prior to that position, Mr. Bassi spent 25 years in a wide range of financial and general management positions at PepsiCo, Inc., Pepsi-Cola International, Pizza Hut (U.S. and International), Frito-Lay and Taco Bell. Mr. Bassi currently serves as lead director and Chairman of the nominating and governance committee of BJ’s Restau- rant, where he also serves on the audit committee and compensation committee. He has been a member of the board of BJ’s Restaurant since 2004. Mr. Bassi served on the board of Potbelly Sandwich Works and retired in May 2019 after ten years of service. Mr. Bassi served on the Value Optimization Board for the private equity firm Mekong Capital, based in Vietnam, from 2015 to 2018. Mr. Bassi also served on the supervisory board of AmRest Holdings SE from 2013 to 2015, and served on the board of the Pep Boys—Manny, Moe & Jack from 2002 to 2009. Mr. Bassi brings to our Board knowledge of the restaurant industry and global franchising, as well as financial expertise and extensive public company board and corporate governance experience. Christian L. Campbell Age 69 Director Since 2016 Christian L. Campbell owns Christian L. Campbell Consulting LLC, which specializes in global corporate governance and compliance, and he has served as the owner of that entity since February 2016. Mr. Campbell previously served as Senior Vice President, General Counsel and Secretary of YUM from its formation in 1997 until his retirement in February 2016. In 2001, Mr. Campbell’s role was expanded to include Chief Franchise Policy Officer. In these positions, Mr. Campbell oversaw all legal matters at YUM and was responsible for the oversight of YUM purchasing as a director of YUM’s purchasing cooperative with its franchisees. Prior to joining YUM, Mr. Campbell was a Senior Vice President and General Counsel at Owens Corning, an NYSE-listed leading global producer of fiberglass insulation and composite building materials. Prior to Owens Corning, he was Vice President and General Counsel for Nalco Chemical Company, formerly an NYSE-listed company. In addition, Mr. Campbell was a founding director of Restaurant Supply Chain Solutions, Inc. (“RSCS”), a purchasing cooperative for YUM’s U.S. franchising partners, and he served on RSCS’s board of directors from its formation in 2001 until 2015. Mr. Campbell brings to our Board significant expertise in cor- porate governance, corporate compliance and risk management of U.S. publicly traded companies. In addition, Mr. Campbell brings to our Board extensive knowledge of the quick-service restaurant industry, global franchising and corporate leadership. 26 YUM CHINA – 2020 Proxy Statement MATTERS REQUIRING STOCKHOLDER ACTION Ed Yiu-Cheong Chan Age 57 Director Since 2016 Ed Yiu-Cheong Chan has served as the operating partner for SoftBank Investment Advisers, a global advisory firm, since June 2019. In addition, Mr. Chan is a non-executive director of Treasury Wine Estates Limited, a company listed on the Australian Securities Exchange, and an independent non-executive director of Link Real Estate Investment Trust, which is listed on the Stock Exchange of Hong Kong Limited. Mr. Chan was Regional Director of North Asia of the Dairy Farm Group and a director of Dairy Farm Management Services Limited from November 2001 to November 2006. Mr. Chan was the President and Chief Executive Officer of Walmart China from November 2006 to October 2011. Mr. Chan served as Vice Chairman of Charoen Pokphand Group Company Limited and as an Executive Director and Vice Chairman of C.P. Lotus Corporation from 2012 to February 2018. Mr. Chan also served as the senior advisor to Food Union, a European based dairy company, from April 2018 to June 2019 and a venture partner of Gaorong Capital, a venture capital firm based in China (previously named Banyan Capital), from May 2018 to June 2019. Mr. Chan brings to our Board knowledge of the food and beverage industry in Asia and extensive public company board and corporate governance experience. Edouard Ettedgui Age 68 Director Since 2016 Edouard Ettedgui has served as the non-executive Chairman of Alliance Franc¸aise, Hong Kong since 2016. He also serves as a non-executive director of Mandarin Oriental International Limited, the company for which he was the Group Chief Executive from 1998 to 2016. Prior to his time at Mandarin Oriental International, Mr. Ettedgui was the Chief Financial Officer for Dairy Farm International Holdings, and he served in various roles for British American Tobacco, including Business Development Director, Group Finance Controller and Group Head of Finance. Mr. Ettedgui has also held senior finance positions in seven countries at Philips International. Mr. Ettedgui brings to our Board senior manage- ment experience in various international consumer-product industries, extensive financial expertise and public company board experience. Cyril Han Age 42 Director Nominee P r o x y S t a t e m e n t Cyril Han has served as Vice President of Ant Financial Services Group, an innovative payment technology provider, since 2014. He joined Alibaba Group, a Chinese multinational conglomerate, as Senior Director of Corporate Finance in 2011. Before joining Alibaba Group, Mr. Han worked at China International Capital Corporation from July 2001 to September 2011. He has served as a director of Hundsun Technologies Inc., a company listed on the Shanghai Stock Exchange, since February 2016, and has served as a director of Zhong An Online P & C Insurance Co., Ltd., a company listed on the Hong Kong Stock Exchange, since November 2016. Mr. Han brings to our Board deep knowledge and insights in the fields of finance and technology. YUM CHINA – 2020 Proxy Statement 27 MATTERS REQUIRING STOCKHOLDER ACTION Louis T. Hsieh Age 55 Director Since 2016 Louis T. Hsieh has served as a director since 2007 of New Oriental Education & Technology Group, a provider of private educational services in China. Prior to his current role, Mr. Hsieh served as that company’s Chief Financial Officer from 2005 to 2015 and President from 2009 to 2016. In addition, Mr. Hsieh serves as an independent director, member of the nominating and corporate governance committee and Chairman of the audit committee for JD.com, Inc. since 2014. From May 2017 to October 2019, Mr. Hsieh served as the Chief Financial Officer of NIO Inc., a developer of electric, autonomous vehicles. From 2016 to 2017, Mr. Hsieh served as an independent director and Chairman of the audit com- mittee for Nord Anglia Education, Inc. From 2007 to 2010, Mr. Hsieh served as an independent director and Audit Chairman of Perfect World Co., Ltd. and China Digital TV Holding Co., Ltd. Mr. Hsieh brings to our Board corporate leadership and public company board experience as well as his extensive financial and international business experience. Ruby Lu Age 49 Director Since 2016 t n e m e t a t S y x o r P Ruby Lu is a venture capitalist investing in technology start-ups in the U.S. and China. Ms. Lu founded Atypical Ven- tures, an early-stage technology venture investment firm, in 2019. In 2006, she co-founded DCM China, an early-stage venture capital firm. During her more than 12-year tenure at DCM, she invested in and served as a board member for many leading technology companies including BitAuto Holdings Limited, Ecommerce China Dangdang Inc. and Pac- tera Technology International Ltd. Prior to joining DCM, Ms. Lu was a Vice President in the technology, media and tele- communications investment banking group of Goldman Sachs & Co. in Menlo Park, California. She also served as an independent director and on the audit committee of iKang Healthcare Group, Inc., and served as an independent director and Chairman of the special committee for iDreamSky Technologies Limited before these two companies were taken private. Ms. Lu is currently an independent director on the board of Uxin Limited, where she also serves as the Chairman of the compensation committee and member of audit committee and nominating and governance committee. Ms. Lu brings to our Board public company board experience as well as extensive financial and global market experience. 28 YUM CHINA – 2020 Proxy Statement MATTERS REQUIRING STOCKHOLDER ACTION Zili Shao Age 60 Director Since 2016 Zili Shao is an accomplished lawyer and investment banker with extensive professional experience. Mr. Shao is the non- executive Chairman of Fangda Partners, a leading PRC law firm, since June 2017. He also serves as an Independent Non-executive Director of Bank of Montreal (China) Co., Ltd., and an Independent Non-executive Director of Home Credit N.V. Mr. Shao is the founder and Chairman of MountVue Capital Management Co. Ltd. He served as co- Chairman and partner of the law firm King & Wood Mallesons China between April 2015 and May 2017. He was a Chairman and CEO of JP Morgan China between 2010 and 2015, and later the Vice Chairman of J.P. Morgan Asia Pacific. Prior to J.P. Morgan, Mr. Shao was a former partner at Linklaters, a leading international law firm, for 12 years. He acted as managing partner of Linklaters of Greater China and subsequently was appointed managing partner of the Asia Pacific. Mr. Shao brings to our Board extensive professional experience in Asia and public company board and cor- porate governance experience. William Wang Age 45 Director Since 2017 William Wang is one of the founding partners of Primavera. Prior to Primavera, Mr. Wang served as a Managing Direc- tor of Goldman Sachs Merchant Banking/Principal Investment Area (“GS”), where he led significant successful invest- ments in China for the group. Prior to GS, Mr. Wang worked in Investment Banking Division and Private Equity Group of China International Capital Corporation Limited (CICC). Mr. Wang currently serves as a director on the board of Geely Automobile Holdings Limited, a Hong Kong listed company, and Sunlands Technology Group, an NYSE-listed company, in addition to directorships at Primavera’s portfolio companies. Mr. Wang brings to our Board deep knowl- edge and investment insights of the Chinese market. P r o x y S t a t e m e n t YUM CHINA – 2020 Proxy Statement 29 MATTERS REQUIRING STOCKHOLDER ACTION ITEM 2. Ratification of Independent Auditor What am I voting on? We are asking stockholders to approve a proposal to ratify the appointment of KPMG Huazhen LLP (“KPMG”) as our independent auditor for 2020. KPMG has served as our independent auditor since 2016. As part of its audit engagement process, the Audit Com- mittee considers on at least an annual basis the engage- ment of the independent auditor. In deciding to engage KPMG as the independent auditor for 2020, the Audit Committee considered: • KPMG’s performance in 2019; • KPMG’s independence; t n e m e t a t S y x o r P • The depth and expertise of the KPMG’s audit team, including its understanding of the Company’s industry, business, operations and systems, as well as accounting policies and processes; • The appropriateness of KPMG’s fees; desire and will be available to respond to appropriate questions from stockholders. What vote is required to approve this proposal? Approval of this proposal requires the affirmative vote of a majority of the shares present via webcast or represented by proxy and entitled to vote at the Annual Meeting. The Audit Committee and the Board of Directors recommend that you vote FOR approval of this proposal. What were KPMG’s fees for audit and other services for 2019 and 2018? The following table presents fees for professional services rendered by KPMG for the audit of the Company’s annual financial statements, and fees billed for audit- related services, tax services and all other services ren- dered by KPMG for 2019 and 2018. All KPMG services for 2019 and 2018 were approved in advance by the Audit Committee specifically or pursuant to procedures outlined below. • A consideration of KPMG’s known legal risks and sig- nificant proceedings that may impair its ability to per- form the audit; and • KPMG’s tenure as the Company’s independent auditor. KPMG rotates its lead audit engagement partner every five years. The Audit Committee is directly involved in the evaluation of the lead audit engagement partner to ensure that the he or she is appropriately qualified to lead the Company’s audit. After considering the criteria set forth above, the Audit Committee believes that retaining KPMG as the Company’s independent auditor is in the best interests of the Company and its stockholders. Will a representative of KPMG attend the Annual Meeting? Audit fees(1) Audit-related fees(2) . . . . . . . Tax fees(3) . . . . . . . . . . . . . . . All other fees . . . . . . . . . . . . 2019 . . . . . . . . . . . . . $ 2,613,403 $ 2,973,606 11,446 22,766 — 12,237 25,905 — 2018 TOTAL FEES . . . . . . . . . . . . $ 2,651,545 $ 3,007,818 (1) Audit fees include fees for the audit of the annual consolidated financial statements included in the Company’s annual reports, reviews of the interim condensed consolidated financial statements included in the Company’s quarterly reports, and services related to statutory filings or engagements. (2) Audit-related fees include audits of financial state- ments of certain employee benefit plans, agreed- upon procedures and other attestations. Representatives of KPMG will attend the Annual Meet- ing, will have the opportunity to make a statement if they (3) Tax fees consist principally of fees for tax filling assistance services. 30 YUM CHINA – 2020 Proxy Statement MATTERS REQUIRING STOCKHOLDER ACTION is the Company’s policy regarding the What approval of audit and non-audit services? The Audit Committee has implemented a policy for the pre-approval of all audit and permitted non-audit services, including tax services, proposed to be provided to the Company by its independent auditor. Under the policy, the Audit Committee may approve engagements on a case-by-case basis or pre-approve engagements on a cate- gorical basis pursuant to the Audit Committee’s pre-approval policy. The Audit Committee may delegate pre-approval authority to one of its independent members and has currently delegated pre-approval authority up to certain amounts to its Chairperson. In considering pre-approvals, the Audit Committee con- siders the nature, scope and fees of the service to be pro- vided to the Company as well as the principles and guidance established by the SEC and the Public Company Accounting Oversight Board (“PCAOB”) with respect to auditor independence. Services as to which a general pre-approval has been granted on an annual basis are effective for the applicable year. Any proposed service for which the estimated fees would cause the total fees for that class of service to exceed the applicable estimated fee threshold requires specific approval by the Audit Com- mittee or its delegate. The Principal Accounting Officer monitors the perfor- mance of all services provided by the independent auditor and determines whether such services are in compliance with this policy. The Principal Accounting Officer reports periodically to the Audit Committee with respect to com- pliance with this policy and the status of outstanding engagements, including actual services provided by the independent auditor and associated fees, and must promptly report to the Chairperson of the Audit Commit- tee any non-compliance (or attempted non-compliance) with this policy of which the Corporate Controller becomes aware. P r o x y S t a t e m e n t YUM CHINA – 2020 Proxy Statement 31 MATTERS REQUIRING STOCKHOLDER ACTION ITEM 3. Advisory Vote on Named Executive Officer Compensation What am I voting on? In accordance with SEC rules, we are asking stockholders to approve, on a non-binding basis, the compensation of the Company’s named executive officers as disclosed in this proxy statement. This non-binding advisory vote is also known as the “Say on Pay” vote. This is not a vote on the Company’s general compensation policies or the compensation of the Board. At the 2019 annual meeting of the Company’s stockholders, approximately 96% of the votes cast by our stockholders were voted in approval of the compensation of our named executive officers as disclosed in the 2019 proxy statement. t n e m e t a t S y x o r P Our performance-based executive compensation program is designed to attract, reward and retain the talented lead- ers necessary for our Company to succeed in the highly competitive market for talent, while maximizing stock- holder returns. This approach has made our management team a key driver in the Company’s strong performance over both the long and short term. We believe that our compensation program has attracted and retained strong leaders, and is closely aligned with the interests of our stockholders. In deciding how to vote on this proposal, we urge you to read the Compensation Discussion and Analysis section of this proxy statement, which discusses in detail how our compensation policies and procedures operate and are designed to meet our compensation goals and how our Compensation Committee makes compensation deci- sions under our programs. Accordingly, we ask our stockholders to vote in favor of the following resolution at the Annual Meeting: “RESOLVED, that the compensation paid to the named executive officers, as disclosed in the Compensation Dis- cussion and Analysis, the compensation tables and related materials included in the proxy statement, is hereby approved.” What vote is required to approve this proposal? Approval of this proposal requires the affirmative vote of a majority of shares present via webcast or represented by proxy and entitled to vote at the Annual Meeting. While this vote is advisory and non-binding on the Company, the Board of Directors and the Compensation Committee will review the voting results and consider stockholder concerns in their continuing evaluation of the Company’s compensation program. What is the recommendation of the Board of Directors? The Board of Directors recommends that you vote FOR approval of this proposal. 32 YUM CHINA – 2020 Proxy Statement STOCK OWNERSHIP INFORMATION Who are our largest stockholders? The following table sets forth the number of shares of Company common stock beneficially owned as of March 17, 2020 by (i) beneficial owners of more than 5% of the outstanding shares of Company common stock, (ii) each of the Company’s named executive officers, (iii) each of the Company’s directors and director nomi- nees and (iv) all of the Company’s directors and executive officers as a group. Name of Beneficial Owner More Than 5% Owners In accordance with SEC rules, beneficial ownership includes all shares the stockholder actually owns benefi- cially or of record, all shares over which the stockholder has or shares voting or dispositive control and all shares the stockholder has the right to acquire within 60 days of March 17, 2020. Except as indicated in the footnotes to the table, the Company believes that the persons named in the table have sole voting and investment power with respect to all shares owned beneficially by them. Number of Shares Beneficially Owned Percent of Shares(1) Invesco Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,144,958(2) 9.9% 1555 Peachtree Street NE, Suite 1800 Atlanta, GA 30309 BlackRock, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,726,735(3) 8.2% 55 East 52nd Street New York, NY 10055 Primavera Capital Management Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,836,607.51(4) 6.2% 28 Hennessy Road, 28th Floor Hong Kong P r o x y S t a t e m e n t Named Executive Officers Joey Wat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Andy Yeung . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Johnson Huang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Danny Tan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aiken Yuen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jacky Lo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shella Ng . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Employee Directors and Director Nominees Peter A. Bassi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Christian L. Campbell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ed Yiu-Cheong Chan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edouard Ettedgui . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cyril Han . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louis T. Hsieh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fred Hu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ruby Lu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Micky Pant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Zili Shao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . William Wang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,535(5) 0 68,608(6) 74,932(7) 17,649(8) 445 0 54,832 144,798(9) 22,022 22,570 6,873 53,815 26,731 25,959 900,805(10) 22,148 19,175 Ownership of all directors and executive officers as a group (21 total) . . . . . . . . . . . . . . . . . . . . 1,700,277(11) * * * * * * * * * * * * * * * * * * * YUM CHINA – 2020 Proxy Statement 33 STOCK OWNERSHIP INFORMATION * Represents less than one percent (1) (2) (3) (4) Percentage ownership is determined based on a total of 376,101,276 shares of Company common stock outstand- ing as of March 17, 2020. Based on Amendment No. 1 to the Schedule 13G filed by Invesco Ltd. on February 12, 2020, which indicated that, as of December 31, 2019, Invesco Ltd. had sole voting power over 36,903,454 shares of Company common stock and sole dispositive power over 37,144,958 shares of Company common stock. Based on Amendment No. 4 to the Schedule 13G filed by BlackRock, Inc. on February 6, 2020, which indicated that, as of December 31, 2019, BlackRock, Inc. had sole voting power over 26,340,093 shares of Company com- mon stock and sole dispositive power over 30,726,735 shares of Company common stock. Based on (i) Amendment No. 4 to the Schedule 13D filed by Primavera Capital Management Ltd. on November 4, 2019, which indicated that, as of October 31, 2019, Primavera Capital Management Ltd. had sole voting and dispositive power over 24,908,437.02 shares of Company common stock, Pollos Investment GP Ltd. shared voting and dispositive control over 16,364,778 shares of Company common stock and Pollos L.L.C. shared voting and dispositive control over 8,543,659.02 shares of Company common stock and (ii) Form 4 filed on November 12, 2019 reporting a subsequent transaction, which indicated that Pollos Upside L.P. entered into a pre-paid forward transaction with respect to 1,071,829.51 shares underlying outstanding Warrants. The amount reported in the table includes 7,471,829.51 shares underlying outstanding Warrants. (5) Includes 107,006 shares issuable upon the exercise of vested stock appreciation rights (“SARs”). (6) Includes 50,954 shares issuable upon the exercise of vested SARs. (7) Includes 50,266 shares issuable upon the exercise of vested SARs. (8) Includes 17,649 shares issuable upon the exercise of vested SARs. (9) Includes 90,992 shares issuable upon the exercise of vested SARs. Also includes 80 shares held by Mr. Camp- bell’s spouse. (10) Includes 593,660 shares issuable upon the exercise of vested SARs. (11) Includes 967,071 shares issuable upon the exercise of vested SARs. t n e m e t a t S y x o r P 34 YUM CHINA – 2020 Proxy Statement EXECUTIVE COMPENSATION COMPENSATION DISCUSSION AND ANALYSIS three other most highly compensated executive officers for 2019, our former Chief Financial Officer and Trea- surer, and our former Chief Legal Officer and Corporate Secretary. References to “continuing NEOs” in this CD&A refer to the NEOs actively employed by us as of December 31, 2019. This Compensation Discussion and Analysis (our “CD&A”) provides an overview of our executive com- pensation program for 2019 and our executive compen- sation philosophies and objectives. Our named executive officers (“NEOs”) consist of our Chief Executive Officer, our Chief Financial Officer, our For 2019, our NEOs were: Name Joey Wat Andy Yeung Title Chief Executive Officer (“CEO”) Chief Financial Officer (“CFO”)* Johnson Huang General Manager, KFC Danny Tan Aiken Yuen Jacky Lo Shella Ng Chief Supply Chain Officer Chief People Officer Former CFO and Treasurer* Former Chief Legal Officer and Corporate Secretary* * Ms. Ng resigned as Chief Legal Officer and Corporate Secretary, effective April 30, 2019, and served as Senior Consultant until November 30, 2019. Mr. Lo resigned as CFO and Treasurer, effective October 16, 2019. In September 2019, the Company appointed Mr. Yeung to serve as the CFO-Designate of the Company, effective September 16, 2019, and CFO, effective October 16, 2019. Please see the “2019 NEO Compensation and Perfor- mance Summary” section in this CD&A for a summary of the compensation arrangements with Mr. Lo and Ms. Ng. This CD&A is divided into four sections: Executive Summary • 2019 Business Overview and Performance Highlights • Alignment of Executive Compensation Program with Business Performance Elements of the Executive Compensation Program • Recent Compensation Highlights • Pay Components • Executive Compensation Practices • Stockholder Engagement • Base Salary • Annual Performance-Based Cash Bonuses • Long-Term Equity Incentives • Other Elements of Executive Compensation Program YUM CHINA – 2020 Proxy Statement 35 P r o x y S t a t e m e n t EXECUTIVE COMPENSATION How Compensation Decisions Are Made Compensation Policies and Practices • 2019 NEO Compensation and Performance Summary • 2020 Special Long-Term Performance-Based Grants • Executive Compensation Philosophy • Role of the Compensation Committee • Role of the Independent Consultant • Competitive Market Review • Compensation Recovery Policy • Equity-Based Awards Grant Policy • Stock Ownership Guidelines • Hedging and Pledging of Company Stock Executive Summary 2019 Business Overview and Highlights Performance • Total system sales for the year grew 9% year-over-year, excluding F/X; t n e m e t a t S y x o r P 2019 was a year of significant financial and operational accomplishments for the Company. As of the end of 2019, the Company continued to be the largest restaurant company in China in terms of system sales, with $8.8 billion in revenue and 9,200 restaurants. Our restau- rant base consists of KFC, the leading and the largest quick-service restaurant brand in China in terms of system sales, Pizza Hut, the leading and the largest casual dining restaurant brand in China in terms of system sales and number of restaurants, Little Sheep, COFFii & JOY, East Dawning and Taco Bell. We maintain the exclusive right to operate and sub-license the KFC, Pizza Hut and, sub- ject to the achievement of certain agreed-upon milestones, Taco Bell brands in China (excluding Hong Kong, Taiwan and Macau), and we own the Little Sheep, COF- Fii & JOY and East Dawning concepts outright. Our 2019 performance highlights include the following: • Opened over 1,000 new restaurants, the most annual restaurant openings in our history, reaching a total of 9,200 restaurants across more than 1,300 cities; • Remodeled almost 1,000 restaurants; • Total revenues increased 4% year-over-year to $8.78 billion from $8.42 billion (9% year-over-year increase, excluding foreign currency translation (“F/X”)); 36 YUM CHINA – 2020 Proxy Statement • Same-store sales grew by 3% year-over-year, excluding F/X; • Restaurant margin increased to 16.0% (year-over-year increase of 0.3 percentage points); • Operating profit decreased 4% year-over-year to $901 million from $941 million in 2018 (1% year-over- year increase excluding F/X), and adjusted operating profit increased 7% year-over-year to $912 million from $855 million (12% year-over-year increase, excluding F/X); • Net income increased 1% to $713 million from $708 million in 2018 (6% year-over-year increase excluding F/X), and adjusted net income increased 20% to $729 million from $606 million in 2018 (5% year- over-year increase, excluding the mark-to-market gain of $63 million in 2019 and mark-to-market loss of $27 million in 2018 from our equity investment in Meituan-Dianping, and 11% increase when also excluding F/X); • Diluted earnings per common share increased 3% to $1.84 from $1.79 in 2018, and adjusted diluted earnings per common share increased by 23% to $1.88 from $1.53 in 2018 (7% year-over-year increase excluding the mark-to-market gain or loss from the Company’s EXECUTIVE COMPENSATION equity investment in Meituan-Dianping in 2019 and 2018, and 13% increase when also excluding F/X); and • KFC and Pizza Hut’s combined digital membership grew by over one-third in 2019 to 240 million. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for a reconciliation of adjusted operating profit, adjusted net income and adjusted diluted earnings per common share to the most comparable GAAP financial measures. Alignment of Executive Compensation Program with Business Performance Attracting, motivating and retaining talented executives is critical to our success, and our executive compensation programs are designed to support this objective. The Company’s executive compensation program is struc- tured to support the long-term sustainable growth of the Company and create value for stockholders by aligning our executives with business performance goals. As such, the Compensation Committee reviews and endorses per- formance goals that are deemed central to the Company’s business performance and stockholder value creation. Specifically, the Compensation Committee has selected performance goals under the Company’s 2019 incentive programs that are based on operating profit, same store sales, new builds, customer satisfaction, and, in case of Ms. Wat’s performance stock units (“PSUs”), total share- holder return. These performance goals comprise an overall executive compensation program that the Com- pensation Committee believes appropriately reflects the Company’s emphasis on increasing profitability and rev- enue, enhancing customer experience and creating stock- holder value. The following chart provides an overview of the 2019 tar- get total direct compensation program applicable to our CEO, consisting of base salary, annual performance- based cash incentives (i.e., short-term incentives, or “STI”), and long-term equity incentives (“LTI”). As demonstrated by the following chart, 2019 compensation for our CEO was heavily weighted toward variable pay elements, and such elements represented approximately 85% of the 2019 annual target compensation for Ms. Wat (consisting of the target payout opportunity under the cash bonus plan, target PSU grant and stock-settled stock appreciation rights and excluding all other compensation reported in the 2019 Summary Compensation Table). P r o x y S t a t e m e n t Base Salary 15% 2019 CEO Compensation Mix (at Target) STI 20% LTI 65% Total Variables - 85% Recent Compensation Highlights As part of its ongoing review of the executive compensa- tion program, and based on a review of market practices, input from the Compensation Committee’s compensation consultant and stockholder feedback, the Compensation Committee recently implemented the following changes to the Company’s executive compensation program: • Granted Partner PSU Awards: As further described below in the “2020 Special Long-Term Performance- the Based Grants” section, on February 7, 2020, YUM CHINA – 2020 Proxy Statement 37 expanded to include all executive officers, including each of the continuing NEOs, with a 2020 annual equity grant in the form of SARs and PSUs. As a result of this change, the entire portion of the annual equity grant is considered by the Compensation Committee to be per- formance-based as the PSUs will vest based only on the Company’s achievement of performance goals relating to Adjusted Total Revenue Growth and growth in diluted earnings per common share adjusted to exclude certain items for the purpose of Annual PSU Grants (“Adjusted Diluted Earnings Per Common Share Growth”), with a relative total shareholder return pay- out modifier against the MSCI China Index, and the SARs will realize value only to the extent the Compa- ny’s stock price increases from the date of grant. • Adopted Change in Control Severance Plan: In September 2019, upon recommendation of the Com- pensation Committee, the Board adopted a Change in Control Severance Plan to provide severance benefits to certain key management employees, including each of the continuing NEOs, in the event of termination of employment by the Company without cause or by the NEO for good reason, in each case within 24 months following a change in control of the Company, under a ‘double trigger’ provision. The Change in Control Sev- erance Plan was adopted after a review of market data and to facilitate the recruitment and retention of key management personnel. The Compensation Committee believes that benefits under the plan are reasonable and appropriate to protect the Company’s key management employees against circumstances over which they do not have control, and provides the Company with addi- tional consideration for the NEO’s agreement to restric- tive non-competition, non-solicitation, confidentiality and non-disparagement. covenants relating to EXECUTIVE COMPENSATION Compensation Committee granted a special award of performance stock units (“Partner PSU Awards”) to select employees of the Company and its subsidiaries who were deemed critical to the Company’s execution of its strategic operating plan, including each of the continuing NEOs. The Partner PSU Awards will vest only if threshold performance goals relating to stock price, growth in total revenues adjusted to exclude cer- tain items for the purpose of Partner PSU Awards (“Adjusted Total Revenue Growth”), growth in EBITDA adjusted to exclude certain items for the pur- pose of Partner PSU Awards (“Adjusted EBITDA Growth”), and transformational objectives are achieved over a four-year performance period commencing on January 1, 2020 and ending on December 31, 2023. Based on performance, vesting may range from 0% to 200% of the target number of shares subject to the Part- ner PSU Awards. The Partner PSU Awards also include non-competition and non-solicitation restrictive covenants. The Partner PSU Awards were granted to (i) address increased competition from new retail plat- form companies in China as well as other startup com- panies and the existing pay gap, (ii) incentivize an entrepreneurial mindset and transformational perfor- mance that the Compensation Committee believes will contribute to business growth and exceptional share- holder value creation and (iii) facilitate long-term reten- tion, which has become increasingly important in light of senior leadership changes over the past several years. • Expanded Recipients of Annual PSU Grants: Since 2018, the CEO’s annual equity grant has been delivered in the form of equally weighted PSUs and SARs, while the Company’s other NEOs (other than Mr. Yeung) received an equal mix of SARs and time-based restricted stock units (“RSUs”). Beginning with the 2020 annual equity grants, the PSU program has been t n e m e t a t S y x o r P 38 YUM CHINA – 2020 Proxy Statement EXECUTIVE COMPENSATION Pay Components The Company’s executive compensation program has three primary pay components: (i) base salary; (ii) annual performance-based cash bonuses (i.e., short-term incen- tives); and (iii) long-term equity awards. We believe that these key elements are aligned with the Company’s com- pensation philosophy and objectives, as illustrated in the following table. Objective Annual Performance- Based Cash Bonuses Base Salary Long-Term Equity Incentives Attract and retain the right talent to achieve superior stockholder results — Competitive total reward program structure that enables pay to vary based on role, responsibility, experience, market value and future . . . . . . potential of talent in order to drive superior results year over year. X Reward performance — Motivate both short-term and long-term performance through annual and long-term equity programs. A majority of NEO annual target compensation is performance-based or variable and, therefore, at-risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Emphasize long-term value creation — The Company’s belief is simple: if it creates long-term value for stockholders, then it shares a portion of that value with those responsible for the results. SARs, RSUs and PSUs focus on the long-term performance of the Company and directly align the interests of the recipients with those of the Company’s stockholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Drive ownership mentality — We require executives to invest in the Company’s success by owning a substantial amount of Company stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X X X X X X P r o x y S t a t e m e n t YUM CHINA – 2020 Proxy Statement 39 EXECUTIVE COMPENSATION Executive Compensation Practices The Compensation Committee reviews on an ongoing basis the Company’s executive compensation program to evaluate whether it supports the Company’s executive compensation philosophies and objectives and is aligned with stockholder interests. Our executive compensation practices include the following, each of which the Com- pensation Committee believes reinforces our executive compensation philosophy and objectives: Our Executive Compensation Practices ✓ We deliver a significant percentage of annual target compensation in the form of variable compensation tied to performance, with 85% of Ms. Wat’s 2019 annual target compensation in the form of variable pay elements ✓ We deliver a significant portion of total compensation in the form of equity ✓ We have multi-year vesting periods for equity awards ✓ We perform market comparisons of executive compensation against a relevant peer group, recognizing the dif- ferent geographic regions where executives are sourced and recruited ✓ We use an independent compensation consultant reporting directly to the Compensation Committee ✓ We have double-trigger vesting for equity awards in the event of a change in control under our long-term incen- tive plan ✓ We maintain stock ownership guidelines ✓ We maintain a compensation recovery policy ✓ We maintain an equity-based awards grant policy specifying pre-determined dates for annual equity grants ✓ We hold an annual “say on pay” vote ✓ We maintain an annual stockholder engagement process ✓ Our Compensation Committee regularly meets in executive session without any members of management t n e m e t a t S y x o r P present X We do not pay dividends or dividend equivalents on PSUs unless and until they vest X We do not allow repricing of underwater SARs under our long-term incentive plan without stockholder approval X We do not allow hedging, short sales or pledging of our securities X We do not allow backdating of SARs Stockholder Engagement In its compensation review process, the Compensation Committee focuses on structuring the executive compen- sation program to serve the interests of our stockholders. In that respect, as part of its ongoing review of our execu- tive compensation program, the Compensation Commit- tee considered the approval by approximately 96% of the votes cast for the Company’s “say on pay” vote at our 2019 Annual Meeting of Stockholders. Although the Compensation Committee was pleased with this favor- able outcome and interpreted this level of support as an endorsement by our stockholders of our executive com- pensation program and policies, the Compensation Com- mittee has nevertheless undertaken efforts to evaluate and further enhance our executive compensation program to continue improving its alignment with the creation of long-term value and the furtherance of our stockholders’ interests. For example, in 2020, the Compensation Com- mittee granted the Partner PSU Awards to address increased competition and the existing competitive pay gap, motivate transformational performance aligned with the long-term interests of the Company’s stockholders, and encourage management retention over the four-year performance period. 40 YUM CHINA – 2020 Proxy Statement The Compensation Committee values direct and con- structive engagement with the Company’s investors to facilitate a continuing open dialogue to exchange ideas with and respond to questions from investors on compen- sation matters. During 2019, the Company reached out to its 25 largest stockholders and other selected stockholders (which represented more than 50% of the Company’s outstanding shares) to solicit feedback on a variety of cor- porate governance matters (including with respect to executive compensation), and the Company held discus- sions with all stockholders who accepted an invitation. Management shared this stockholder feedback with the Compensation Committee for its consideration in design- ing the Company’s executive compensation program. Based on feedback received during the Company’s stock- holder engagement, the Compensation Committee approved the following changes to the Company’s execu- tive compensation program: • 50% of Equity Compensation Delivered as PSUs— Beginning with the 2020 annual PSU grants, the NEOs’ equity awards will be delivered in the form of PSUs and SARs, each weighted 50%, with the PSUs vesting based on the achievement of pre-established EXECUTIVE COMPENSATION performance goals and the SARs only delivering value if the stock price appreciates from the grant date. • Expanded Use of PSUs—Beginning in 2020, the Compensation Committee expanded the PSU pro- gram to include all continuing NEOs. • Expanded Performance Metrics Used under the LTI Program—Beginning with the 2020 annual PSU grants, the Compensation Committee included three performance measures (Adjusted Total Revenue Growth, Adjusted Diluted Earnings Per Common Share Growth and relative TSR (as a performance modifier)) as compared to its prior practice of using only TSR to determine vesting levels. The Compensation Committee continuously evaluates plan design and considers adjustments to the Company’s compensation programs based on market and other con- siderations. The Compensation Committee is committed to serving the Company’s stockholders and plans to con- tinue to engage with and respond to feedback from stock- holders as the Company moves forward. P r o x y S t a t e m e n t Elements of the Executive Compensation Program The Company’s 2019 executive compensation program consists of three primary pay components: (i) base salary; (ii) annual performance-based cash bonuses (i.e., short- term incentives); and (iii) long-term equity awards. The following chart demonstrates that 2019 compensation for Ms. Wat, our CEO, and our other NEOs (excluding Mr. Yeung, Mr. Lo and Ms. Ng due to the 2019 manage- ment transitions) was heavily weighted toward variable pay elements. Such elements represented approximately 85% of the 2019 annual target compensation for Ms. Wat (consisting of the target payout opportunity under the cash bonus plan, target PSU grant and SAR grant and exclud- ing all other compensation reported in the 2019 Summary Compensation Table) and, on average, 66% of the 2019 annual target compensation for our other continuing NEOs other than Mr. Yeung (consisting of the target pay- out opportunity under the cash bonus plan, SAR grants and RSU grants and excluding all other compensation reported in the 2019 Summary Compensation Table). YUM CHINA – 2020 Proxy Statement 41 EXECUTIVE COMPENSATION 15% 2019 CEO Compensation Mix (at Target) 20% 65% Base Salary STI LTI 39% 34% 2019 Other NEOs Compensation Mix (at Target) 27% Total Variables - 85% Total Variables - 66% Base Salary The Company provides a fixed level of cash compensa- tion to attract and retain high-caliber talent. Base salary in the form of cash compensates executives for their primary roles and responsibilities. An executive’s actual salary is dependent on factors such as the executive’s role (includ- ing the market value of the role), level of responsibility, experience, individual performance and future potential. The Compensation Committee annually reviews salary levels of the Company’s executive officers. Annual Performance-Based Cash Bonuses The principal purpose of our cash-based annual incentive program is to motivate and reward short-term team and individual performance. The following is the formula used to calculate 2019 annual performance-based cash bonuses: t n e m e t a t S y x o r P Base Salary × Target Bonus Percentage (As a % of Base Salary) × Team Performance Factor (0%-200%) × Individual Performance Factor (0%-150%) = Final Individual Performance Bonus Payout In conjunction with setting 2019 compensation opportu- nities, the Compensation Committee reviewed the perfor- mance measures used in the annual incentive plan to assess the program’s alignment of the incentive payouts with key performance measures of the Company’s overall business and operating segments for 2019. The measures described below were selected because they were viewed as key indicators of the Company’s success in executing against its business plans. The Compensation Committee established the team per- formance measures, targets and weights for the 2019 bonus program at the beginning of the year after receiving input and recommendations from management and the Compensation Committee’s compensation consultant. The team performance objectives and targets in 2019 were developed through the Company’s annual financial planning process, which took into account growth strat- egies, historical performance, and the expected future operating environment of the Company, including the very strong performance of KFC in 2018 which reset the performance baseline to measure 2019 improvement, the continuous revitalization of the Pizza Hut where operating margins were expected to be under pressure, the com- modity inflation and wage inflation. The performance tar- gets were designed to be challenging but achievable with 42 YUM CHINA – 2020 Proxy Statement EXECUTIVE COMPENSATION The team performance targets, actual results, weights and overall performance for each measure for the Company’s NEOs are outlined below. The Company’s performance metrics were established as growth rate goals, requiring performance better than in 2018 in order to receive a tar- get payout. As such, while the growth rate goals are set below last year’s growth rate goals, they would require improvement over last year’s actual results. strong management performance. A leverage formula for each team performance measure magnifies the potential impact that performance above or below the performance target will have on the calculation of the annual bonus. This leverage increases the payouts when targets are exceeded and reduces payouts when performance is below target. There is a threshold level of performance for all measures that must be met in order for any bonus to be paid. Additionally, all measures have a cap on the level of performance above which no additional bonus will be paid regardless of performance above the cap. COMPANY Team Performance Measures Adjusted Operating Profit Growth* . . . . . . . . . . . Same Store Sales Growth** . . . . . . . . . . . . . . . . . System Gross New Builds*** . . . . . . . . . . . . . . . . . System Customer Satisfaction**** . . . . . . . . . . . . FINAL COMPANY TEAM FACTOR . . . . . . . . . . . . KFC Team Performance Measures Adjusted Operating Profit Growth* . . . . . . . . . . . Adjusted Same Store Sales Growth** . . . . . . . . . System Gross New Builds . . . . . . . . . . . . . . . . . . . System Customer Satisfaction**** . . . . . . . . . . . . FINAL KFC TEAM FACTOR . . . . . . . . . . . . . . . . . . Target Actual Earned As a % of Target Weighting Final Team Performance 4.0% 2.7% 642 — 10.4% 3.3% 966 — 200 160 200 184 50% 25% 15% 10% 100 40 30 18 188 Target Actual Earned As a % of Target Weighting Final Team Performance 3.3% 3.0% 450 82% 9.7% 4.1% 742 86% 200 200 200 200 50% 25% 15% 10% 100 50 30 20 200 P r o x y S t a t e m e n t * ** Adjusted Operating Profit Growth as a team performance measure is the adjusted operating profit growth, excluding the impact from the adoption of Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”) and F/X. The impact from the adoption of ASC 842 was excluded to allow adjusted operating profit growth to be calculated on a comparable basis with 2018. We exclude the effects of RMB to USD translations (either positive or negative) because we believe that changes in the foreign exchange rate can cause Operating Profit Growth to appear more or less favorable than business results indicate. Same Stores Sales Growth is disclosed in the Annual Report on Form 10-K. Adjusted Same Store Sales Growth as a team performance measure is adjusted for items to reflect how we evaluate same store sales growth for our brands internally. For KFC, this goal reflects same store sales growth from Company-owned restaurants and res- taurants operated by the Company’s unconsolidated affiliates only (and not franchisee-owned restaurants). *** The Compensation Committee excluded COFFii & JOY when determining the Company’s target and actual results for the System Gross New Builds performance measure because the COFFii & JOY business remains in an initial testing stage, with the Company’s annual plans for new builds subject to change due to the competitiveness of the coffee business and the Company’s ongoing review of COFFii & JOY’s business strategy. **** System Customer Satisfaction is measured based on feedback obtained from customers through online customer surveys. For the Company, this goal is measured on an aggregate basis for all of the Company’s brands, while this goal for KFC is measured only with respect to KFC performance. YUM CHINA – 2020 Proxy Statement 43 EXECUTIVE COMPENSATION t n e m e t a t S y x o r P Based entirely on Company performance, each NEO other than Mr. Huang was assigned a Team Performance Factor of 188%. Mr. Huang was assigned a Final Team Performance Factor of 197%, reflecting the weighting of his Team Performance Factor of 25% Company perfor- mance and 75% KFC performance. At the beginning of 2019, the Compensation Committee established the performance goals that would be used to determine the Individual Performance Factor for the CEO and provided input on the performance goals set by the CEO for the other NEOs, which would subsequently be used by the CEO to recommend the Individual Perfor- mance Factor for each NEO. As part of the Company’s annual performance evaluation process, the CEO, after having received input from the Compensation Committee and after consultation with each NEO, establishes that NEO’s performance objectives for the coming year, which are ultimately approved by the Compensation Committee. These performance objectives are not intended to be rigid or formulaic, but rather to serve as the framework upon which the CEO evaluates the NEO’s overall performance. These annual performance goals generally fell within the performance categories of financial, brand development, execution of strategy, and organizational goals. Under each performance goal category, each NEO has a number of underlying pre-established goals against which the NEO’s performance is assessed to determine whether the NEO has achieved the overall performance goal. The evaluation of an executive’s performance relative to these goals is inherently subjective, involving a high degree of judgment based on the CEO’s observations of, and inter- actions with, the executive throughout the year. As an additional input to the evaluation of an executive’s per- formance, the CEO assesses the overall performance of the Company in light of the dynamics of the China mar- ket. As a result, no single performance goal or group of goals is determinative for the CEO’s evaluation of the executive’s performance. cusses the CEO’s recommendations and meets separately in executive session to discuss the CEO’s recommenda- tions and make a determination of the Individual Perfor- mance Factor for the NEOs, excluding the CEO. The Compensation Committee applies similar factors in determining the Individual Performance Factor for the CEO. The Compensation Committee meets in executive session to discuss the CEO’s individual performance and then consults with the Chairman of the Board for their collective determination of the CEO’s Individual Perfor- mance Factor. The evaluation of the CEO’s overall per- formance relative to these factors is also inherently subjective, involving a high degree of judgment. The Compensation Committee and the other independent directors assess the overall performance of the Company in light of the dynamics of the China market in which the Company operates. As a result, no single performance goal or group of goals is determinative for the evaluation of the CEO’s performance. The use of Individual Performance Factors provides the Company with a degree of flexibility (applied reasonably and in moderation by the Compensation Committee) to reward contributions to strategic business initiatives and the building of organizational capabilities supportive of the creation of long-term value. Based on the foregoing, the Compensation Committee assigned 2019 Individual Performance Factors for the continuing NEOs ranging from 120% to 150%, as described below under “2019 NEO Compensation and Performance Summary.” Long-Term Equity Incentives The Company provides long-term equity compensation to its executives to encourage decision-making that creates long-term sustainable stockholder value. In determining the size of the annual equity awards, the Compensation Committee considers the following: The above evaluation provides the basis for the CEO’s recommendation to the Compensation Committee for the executive’s Individual Performance Factor. The Com- pensation Committee then meets with the CEO and dis- • Prior year individual and team performance; • Expected contributions in future years; 44 YUM CHINA – 2020 Proxy Statement EXECUTIVE COMPENSATION • The market value of the executive’s role compared with similar roles in the Company’s peer group, based on compensation survey data; and • Achievement of the Company’s stock ownership guidelines. For 2019, the Compensation Committee granted annual equity awards in the form of 50% SARs and 50% PSUs for Ms. Wat and in the forms of 50% SARs and 50% RSUs for each of our other NEOs (excluding Mr. Yeung, as discussed further below). The SARs vest annually in equal installments of 25%, beginning on the first anniver- sary of the grant date and generally subject to continued employment through the applicable vesting date. The exercise price of each SAR grant is based on the closing market price of the underlying Company stock on the date of grant. The Compensation Committee considers SAR awards to be performance driven, as the SARs will have value only if the share price appreciates above the Com- pany’s closing stock price on the date of grant. The RSUs vest 100% on the third anniversary of the grant date, based on the NEO’s continued employment with the Company through the vesting date. Ms. Wat’s PSU program is designed to incentivize Ms. Wat’s performance over a multi-year performance period and to further align her interests with the interests of our stockholders through the use of an r-TSR performance goal. Under this PSU pro- gram, Ms. Wat’s PSUs will be settled in shares of our common stock based on our r-TSR performance relative to 149 companies in the MSCI International China Index, measured over the 2019–2021 performance period, with payout capped at target if the Company’s TSR is negative over the three-year performance period. For the 2019- 2021 performance period, Ms. Wat will earn a percentage of her target PSU award as set forth in the table below, generally subject to her continued employment through the vesting date, with payout between performance levels determined based on linear interpolation. TSR Percentile Ranking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . <30% Payout as % of Target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0% Threshold 30% 35% Target 55% 100% Maximum 85% 200% P r o x y S t a t e m e n t As noted above, beginning with the 2020 annual equity grants, the PSU program has been expanded to include each of the continuing NEOs, resulting in 2020 annual equity grants in the form of SARs and PSUs, equally weighted. As a result of this change, the entire portion of the annual equity grant is considered by the Compensa- tion Committee to be performance-based as the PSUs will vest based only on the Company’s achievement of per- formance goals relating to Adjusted Total Revenue Growth and Adjusted Diluted Earnings Per Common Share Growth, with a relative total shareholder return payout modifier, and the SARs will realize value only to the extent the Company’s stock price increases from the date of grant. Other Elements Program of Executive Compensation fits are designed to protect against unexpected cata- strophic losses of health and earnings potential and pro- vide a means to save and accumulate assets for retirement. Post-Termination and Change in Control Compensation. As noted above, in September 2019 and based on the rec- ommendations of the Compensation Committee, the Board adopted the Yum China Holdings, Inc. Change in Control Severance Plan (the “Change in Control Sever- ance Plan”). The terms of the Change in Control Sever- ance Plan were determined after a review of market data and consideration of input from the Compensation Con- sultant. The Board determined that adopting the Change in Control Severance Plan was in the best interests of the Company and its stockholders because it serves to retain and incentivize key talent during the period of uncertainty relating to a potential change in control. As with all Company employees, Company executive officers receive certain employment benefits. We believe the benefits we offer are an important part of retention and capital preservation for all levels of employees. Our bene- The Change in Control Severance Plan provides sever- ance benefits to certain key management employees of the Company and its affiliates who are selected by the Compensation Committee to participate in the Plan, YUM CHINA – 2020 Proxy Statement 45 t n e m e t a t S y x o r P EXECUTIVE COMPENSATION including each of the continuing NEOs. Benefits are pay- able upon a “Qualifying Termination,” which is defined as a termination by the Company without cause or by the participant due to good reason, in each case, within 24 months following the consummation of a change in con- trol of the Company. Participation in the Change in Con- trol Severance Plan is conditioned upon the participant’s execution of a participation and restrictive covenant agreement, which contains certain restrictive covenants relating to non-competition, non-solicitation, confidenti- ality and non-disparagement. If a participant’s employment terminates in a Qualifying Termination, he or she will receive, in lieu of any sever- ance benefits under any other arrangement with the par- ticipant, the following severance benefits: • An amount equal to the “Severance Multiple” multi- plied by the sum of (x) such participant’s monthly base salary in effect immediately prior to a Qualifying Ter- mination (or prior to any reduction for purposes of good reason) and (y) 1/12 of the greater of such participant’s annual target cash bonus for the calendar year in which the Qualifying Termination occurs and the most recent annual cash bonus paid to the participant, with such amounts payable over the 12-month period following the participant’s termination of employment. The Sev- erance Multiple is 30 for the CEO and 24 for each of the other participating NEOs. • Any accrued, but unpaid as of the date of the Qualifying Termination, annual cash bonus for any completed fis- cal year preceding a Qualifying Termination, to be paid within 60 days of the Qualifying Termination. • Accrued benefits under any retirement plan or health or welfare plan. • If permitted by the terms of the Company’s health plan and applicable law, continued health insurance cover- age, subsidized by the Company at active employee rates, through the earlier of the one-year anniversary of the participant’s termination of employment and the participant becoming eligible for health insurance cov- erage under another employer’s plan. 46 YUM CHINA – 2020 Proxy Statement • Outplacement services, in an aggregate cost to the Company not to exceed $25,000, for a one-year period (or, if earlier, until the participant accepts an offer of employment). Ms. Wat is party to a letter agreement with the Company that provides severance upon a termination of her employment without “cause.” Under Ms. Wat’s letter agreement, if Ms. Wat’s employment is terminated by the Company without cause prior to March 1, 2021, then she will be entitled to a severance payment, payable in monthly installments, equal to two times her annual base salary and annual bonus target, subject to her compliance with non-solicitation and non-competition restrictive cov- enants. These severance terms were determined during the negotiation of her CEO compensation after consider- ing market data and the input of the Compensation Com- mittee’s compensation consultant at the time. Mr. Yeung is also party to a letter agreement with the Company that provides post-termination compensation upon a termination of his employment without “cause.” Under Mr. Yeung’s letter agreement, if Mr. Yeung’s employment is terminated by the Company without cause, then he will be entitled to a lump sum post- termination compensation payment equal to five times his average monthly base salary during the 12-month period prior this payment, Mr. Yeung must comply with certain non-competition restrictive covenants for one year following his termina- tion of employment. to termination. In return for As of December 31, 2019, Ms. Wat and Mr. Yeung were the only NEOs with agreements with the Company pro- viding severance or post-termination compensation in the event of a termination of employment that is not in con- nection with a change in control. On February 26, 2020, the Committee authorized the entry into Restrictive Covenant Letter Agreements with select employees of the Company, including the NEOs. The Restrictive Covenant Letter Agreements include non-disclosure, restrictive non-competition, and non-disparagement, as well as cooperation in investiga- tions and litigation clauses. As consideration for the restrictive covenants, the Company is obligated to pay an non-solicitation covenants relating to amount equivalent to five times the employee’s average monthly salary upon a termination of employment, other than in the case of a change-in-control-related termination or the employee’s death. Such amount is offset by amounts otherwise owed under any other termination- related agreement between the employee and the Com- pany so that there is no duplication of payments. The award agreements with respect to the Company’s outstanding equity awards also provide for accelerated vesting in the event of certain qualifying terminations of employment. Please see the “Potential Payments upon a Termination or a Change in Control” section below for a quantification of the amounts payable under the Change in Control Sever- ance Plan, Ms. Wat’s letter agreement, Mr. Yeung’s letter agreement and the Company’s equity awards in connec- tion with a termination of employment or change in control. Retirement Plans. The Company offers certain executives working in China retirement benefits under the Bai Sheng Restaurants China Holdings Limited Retirement Scheme (“BSRCHLRS”). Under the BSRCHLRS, executives may make personal contributions, and the Company pro- vides a company-funded contribution ranging from 5% to 10% of a participating executive’s base salary. During 2019, all of our NEOs were participants in the BSRCHLRS, and each NEO received a company-funded contribution. Medical, Dental, and Life Insurance and Disability Coverage. The Company provides benefits such as medi- cal, dental, and life insurance and disability coverage to its executive officers through the same benefit plans that are provided to all eligible China-based employees. EXECUTIVE COMPENSATION are offered mobility Perquisites. Certain perquisites are provided to certain Company executive officers relating to overseas assign- ments. These perquisites are governed by the Company’s on policy, formal a case-by-case basis and reflect each executive’s particu- lar circumstances while also generally reflecting market practices for similarly situated, globally mobile execu- tives working in international companies based in main- land China. For example, the Company may offer perquisites such as housing cost subsidies, dependent education, mobility allowances (applicable only to the CEO and reduced by 50% as of October 2019), home leave payments, and tax preparation services to execu- tives performing services in China. These perquisites are considered to be a necessary component of the Compa- ny’s executive compensation program in order to attract and retain high-performing executives from different countries who have the skill sets and experience to suc- cessfully manage and lead the Company in mainland China. P r o x y S t a t e m e n t Prior to our spin-off from YUM, certain of our NEOs were offered tax equalization benefits as an element of their compensation. These tax equalization benefits rep- resent legacy compensation arrangements entered into with our former parent. After the spin-off, the Compensa- tion Committee began to phase out tax equalization bene- than certain fits for legacy the grandfathered arrangements). the continuing NEOs (other to pursuant benefits See the 2019 All Other Compensation Table in this CD&A for details regarding the perquisites received by our NEOs during 2019. YUM CHINA – 2020 Proxy Statement 47 EXECUTIVE COMPENSATION 2019 NEO Compensation and Performance Summary Below is a summary of our NEOs’ 2019 compensation— which includes base salary, annual cash bonus, equity awards, and compensation arrangements entered into in connection with our CFO transition—and an overview of our NEOs’ 2019 performance relative to the annual per- formance goals. Joey Wat Chief Executive Officer 2019 Performance Summary. Ms. Wat’s 2019 perfor- mance was rated as significantly above target with an Individual Performance Factor of 150%. The Compensa- tion Committee recognized that under Ms. Wat’s leader- ship in 2019, the Company achieved 9% increase in total system sales, 12% increase in adjusted operating profit and 13% increase in adjusted diluted earnings per com- mon share (all excluding F/X). Ms. Wat was instrumental in driving the Company’s strategy of accelerating new builds to expand footprints and extend the Company’s position as the market leader. Over 1,000 new restaurants were opened in 2019, a record high in the Company’s his- tory. Ms. Wat also demonstrated her strategic leadership by guiding the respective brand leaders in successful implementation of KFC’s regional strategy and revital- ization of Pizza Hut’s business fundamentals. The Com- pensation Committee believes that the Company made significant progress, under Ms. Wat’ leadership, towards achieving its multi-year strategic operating plan. Ms. Wat also undertook several organic and inorganic growth ini- tiatives during 2019 and led digitalization initiatives across the Company’s brands including the creation of an end-to-end digital ecosystem. Andy Yeung Chief Financial Officer (since October 16, 2019) t n e m e t a t S y x o r P 2019 Compensation Decisions. Effective February 1, 2019, the Compensation Committee set Ms. Wat’s 2019 compensation levels after considering the advice of its compensation consultant. • Base Salary. Ms. Wat’s base salary was increased from $1,100,000 to $1,188,000, effective February 1, 2019. • Annual Incentive Plan Target and Payout Level. Ms. Wat’s annual cash bonus target remained at 130% of her base salary, resulting in a bonus target for the year of $1,544,400. Ms. Wat’s 2019 annual cash bonus award payout was $4,355,208, reflecting a total payout of 282% of target based on the Team Performance Fac- tor of 188% and Individual Performance Factor of 150%. • Long-Term Incentive Award. Ms. Wat received an annual long-term incentive award with a grant date fair value of approximately $5,000,000 in 2019, unchanged from the prior year and delivered equally in SARs and PSUs. PSUs will be earned based on the Company’s r-TSR over a three-year performance period, as described further above. 2019 Performance Summary. Mr. Yeung has served as the Company’s CFO since October 16, 2019, previously serving as the Company’s CFO-Designate beginning September 16, 2019. The Compensation Committee determined Mr. Yeung’s performance to be above target with an Individual Performance Factor of 120%. Mr. Yeung was recognized for his contribution in refining the multi-year strategic operating plan focusing on trans- forming the strong business models and expanding the Company’s monetization capabilities. Mr. Yeung also led the development of the roadmap to lower effective tax rate and to automate finance support to the Company’s online initiatives. 2019 Compensation Decisions. formulating Mr. Yeung’s compensation as CFO, the Compensation Committee worked closely with its compensation consul- tant to create an overall package that it considered to be In 48 YUM CHINA – 2020 Proxy Statement EXECUTIVE COMPENSATION competitive and reasonable when compared against peer companies, and the compensation paid to Mr. Lo, our for- mer CFO. After considering the advice of its compensa- tion consultant, the Compensation Committee approved the following compensation for Mr. Yeung. • Base Salary. Mr. Yeung’s base salary was set at $650,000. • Annual Incentive Plan Target and Payout Level. Mr. Yeung’s annual cash bonus target was 75% of his base salary, resulting in a bonus target for the year of $487,500, which was prorated to $142,911 for his period of service with the Company during 2019. Mr. Yeung’s prorated 2019 annual cash bonus award payout was $322,407, reflecting a total payout of 226% of target based on the Team Performance Factor of 188% and Individual Performance Factor of 120%. • Long-Term Incentive Award. Mr. Yeung did not receive an annual long-term incentive award for 2019 but received a one-time sign-on RSU award with a grant date fair value of $1,000,000. Johnson Huang General Manager, KFC 2019 Performance Summary. During 2019, Mr. Huang served as General Manager, KFC. Mr. Huang’s perfor- mance was rated as significantly above target with an Individual Performance Factor of 145%. Under Mr. Huang’s leadership in 2019, KFC achieved same stores sales growth of 4% (excluding F/X), and opened 742 new restaurants, exceeding 2018 results by 176 res- taurants while maintaining a restaurant profit margin of 17.8%. KFC also achieved total system sales growth of 11% and operating profit growth of 11% (both excluding F/X). Mr. Huang led the formulation and implementation of regional strategy in development, delivery and other growth initiatives. Mr. Huang also made significant con- tribution to KFC’s digital & delivery initiatives. As of December 31, 2019, KFC’s loyalty program reached a total of over 215 million membership with over 55 million new members added in 2019. 2019 Compensation Decisions. Effective February 1, 2019, the Compensation Committee set Mr. Huang’s Danny Tan Chief Supply Chain Officer 2019 compensation levels after considering the input of its compensation consultant. • Base Salary. Mr. Huang’s base salary was increased from $650,000 to $700,000. • Annual Incentive Plan Target and Payout Level. Mr. Huang’s annual cash bonus target was increased from 75% to 85% of his base salary, resulting in a blended bonus target the year of $589,055. for Mr. Huang’s 2019 annual cash bonus award payout was $1,682,635, reflecting a total payout of 286% of target based on the blended Team Performance Factor of 197% and Individual Performance Factor of 145%. • Long-Term Incentive Award. Mr. Huang received a long-term incentive award with a grant date fair value of approximately $880,000 in 2019, unchanged from the prior year, delivered equally in SARs and RSUs. P r o x y S t a t e m e n t 2019 Performance Summary. The Compensation Com- mittee determined Mr. Tan’s performance to be signifi- cantly above target with an Individual Performance Factor of 140%. Mr. Tan was recognized for his leader- ship in managing the significant raw material price infla- tion and tariff impact in 2019. Mr. Tan led the effort to introduce smart sourcing enabling cost effective product innovation across brands. Mr. Tan continued to imple- ment a highly disciplined approach in maintaining food safety and quality assurance across the Company’s supply chain. Mr. Tan also played an instrumental role in refining the Company’s sustainability strategy and roadmap, which was outlined in the Company’s 2019 Corporate Social Responsibility and Sustainability Report. YUM CHINA – 2020 Proxy Statement 49 EXECUTIVE COMPENSATION 2019 Compensation Decisions. Effective February 1, 2019, the Compensation Committee set Mr. Tan’s 2019 compensation levels after considering the market data provided by its compensation consultant. • Base Salary. Mr. Tan’s base salary was increased from $600,000 to $630,000. • Annual Incentive Plan Target and Payout Level. Mr. Tan’s annual cash bonus target was increased from 75% to 80% of his base salary, resulting in a blended bonus target for the year of $499,079. Mr. Tan’s 2019 annual cash bonus award payout was $1,313,575, reflecting a total payout of 263% of target based on the Team Performance Factor of 188% and Individual Per- formance Factor of 140%. • Long-Term Incentive Award. Mr. Tan received a long- term incentive award with a grant date fair value of approximately $760,000 in 2019, unchanged from the prior year, delivered equally in SARs and RSUs. Aiken Yuen Chief People Officer t n e m e t a t S y x o r P 2019 Performance Summary. The Compensation Com- mittee determined Mr. Yuen’s performance to be significantly above target with an Individual Performance Factor of 140%. Mr. Yuen managed the significant tran- sition to the leadership team in 2019 smoothly. He also provided strategic leadership in enhancing the Compa- ny’s organization capability especially in digital through intensive talent acquisition and retention. Mr. Yuen played a pivotal role in cultivating an entrepreneurial cul- ture through innovative communication programs and targeted incentive schemes. Mr. Yuen’s disciplined approach in manpower planning also contributed to expense effective management. administrative general and 2019 Compensation Decisions. Effective February 1, 2019, the Compensation Committee set Mr. Yuen’s 2019 compensation levels after considering the market data provided by its compensation consultant. • Base Salary. Mr. Yuen’s base salary was increased from $480,000 to $518,000. • Annual Incentive Plan Target and Payout Level. Mr. Yuen’s annual cash bonus target remained at 65% of his base salary, resulting in a bonus target for the year of $335,192. Mr. Yuen’s 2019 annual cash bonus award payout was $882,224, reflecting a total payout of 263% of target based on the Team Performance Factor of 188% and Individual Performance Factor of 140%. • Long-Term Incentive Award. Mr. Yuen received a long-term incentive award with a grant date fair value of approximately $456,000 in 2019, delivered equally in SARs and RSUs. • Retention Award. Mr. Yuen received the first of two installment payments of his 2018 cash retention award in the amount of $99,552 in February 2019 and the sec- ond installment in February 2020, based on his contin- ued employment with the Company through the applicable payment date. Jacky Lo Former Chief Financial Officer and Treasurer (through October 16, 2019) 2019 Compensation Decisions. Effective February 1, 2019, the Compensation Committee set Mr. Lo’s 2019 compensation levels after considering the input of its compensation consultant. • Base Salary. Mr. Lo’s base salary was increased from $650,000 to $670,000. • Annual Incentive Plan Target and Payout Level. Mr. Lo’s annual cash bonus target remained at 75% of 50 YUM CHINA – 2020 Proxy Statement EXECUTIVE COMPENSATION his base salary, resulting in a bonus target for the year of $500,249. Mr. Lo received a 2019 annual cash bonus, prorated for the period from January 1 to October 15, 2019, of $742,068, reflecting a total prorated payout of 188% of target based on the Team Performance Factor of 188% and Individual Performance Factor of 100%. • Long-Term Incentive Award. Mr. Lo received a long- term incentive award with a grant date fair value of approximately $880,000, delivered equally in SARs and RSUs. In connection with his departure, Mr. Lo forfeited all of his unvested long-term incentive awards. The Company and Mr. Lo entered into a Post- Termination Agreement, dated September 6, 2019 (the “Lo Termination Agreement”), which governs the terms of Mr. Lo’s departure and his post-termination obligations to the Company. Under the Lo Termination Agreement, the Company agreed to pay Mr. Lo his prorated 2019 annual cash bonus and a one-time discretionary payment of $333,499. In addition, Mr. Lo became eligible for cer- tain repatriation benefits in accordance with the Compa- ny’s policies. In consideration for these payments, Mr. Lo has agreed to be bound by covenants in favor of the Com- pany relating to non-competition, non-solicitation, non-disparagement and non-disclosure pursuant to the terms set forth in the Lo Termination Agreement. Please see the “Potential Payments upon a Termination or a Change in Control” section below for a quantification of the amounts Mr. Lo received in connection with his separation. Shella Ng Former Chief Legal Officer and Corporate Secretary (through April 30, 2019) and Senior Consultant (from May 1, 2019 through November 30, 2019) 2019 Compensation Decisions. Effective February 1, 2019, the Compensation Committee set Ms. Ng’s 2019 compensation levels after considering the input of its compensation consultant. • Base Salary. Ms. Ng’s base salary was increased from $420,000 to $432,000. • Annual Incentive Plan Target and Payout Level. Ms. Ng’s annual cash bonus target remained at 65% of her base salary, resulting in a bonus target for the year of $279,542. In connection with her departure, Ms. Ng received a 2019 annual cash bonus, prorated for the period from January 1 to April 30, 2019, of $172,780, reflecting a total prorated payout of 188% of target based on the Team Performance Factor of 188% and Individual Performance Factor of 100%. • Long-Term Incentive Award. Ms. Ng received a long- term incentive award with a grant date fair value of approximately $600,000, delivered equally in SARs and RSUs. In connection with her departure, Ms. Ng forfeited all of her unvested long-term incentive awards. • Retention Award. During 2019, Ms. Ng received pay- ment of a cash retention award in the amount of $255,262, which payment was subject to her continued employment with the Company through March 31, 2019. The Company and Ms. Ng entered into a term employ- ment agreement (the “Ng Term Agreement”) pursuant to which Ms. Ng agreed to serve as Senior Consultant to the Company from May 1, 2019 to November 30, 2019. In such capacity, Ms. Ng advised the Company’s manage- ment and the Board on matters pertaining to corporate governance and compliance and provided counsel and guidance with regard to the legal and corporate secretary function and other special projects. In consideration for her services, Ms. Ng was paid monthly compensation of HK$100,000 (US$12,763, based on the exchange rate of 7.8351 HK$ to US$), continued to participate in certain Company employee benefit plans, and received continued vesting of her outstanding equity awards through November 30, 2019. The Ng Term Agreement provided that Ms. Ng would receive a 2019 annual bonus, prorated based on her duration of service as the Company’s Chief Legal Officer and Corporate Secretary during 2019, in an amount determined based on actual performance but P r o x y S t a t e m e n t YUM CHINA – 2020 Proxy Statement 51 EXECUTIVE COMPENSATION t n e m e t a t S y x o r P guaranteed to be no less than HK$700,000 (US$89,342, based on the exchange rate of 7.8351 HK$ to US$). Under the terms of the Ng Term Agreement, Ms. Ng relating to agreed to be bound by covenants non-competition, non-solicitation, non-disparagement and non-disclosure. Please see the “Potential Payments upon a Termination or a Change in Control” section below for a quantification of the amounts Ms. Ng received in connection with her separation. 2020 Special Long-Term Performance-Based Grants As part of its ongoing review of the executive compensa- tion program during 2018 and 2019 and with advice from the Compensation Committee’s independent consultant, the Compensation Committee modified the executive compensation program in 2020 to include a special award of PSUs in the form of the Partner PSU Awards to select employees of the Company and its subsidiaries, including the continuing NEOs, who were deemed critical to the Company’s execution of its strategic operating plan. The Compensation Committee determined that these Partner PSU Awards were necessary to: • Address Increased Competition and the Existing Pay Gap—The Company is increasingly competing for executive talent with new food retail platform compa- nies in China as well as other startup companies. The Company, with a proven and successful track record, is prominent in the restaurant and retail industry in China. Competitors in the new retail space, including startups considering United States or overseas listing, are increasingly competing for executive talent with deep knowledge of both the United States and China market practices and regulatory environments. These competi- tors often offer compensation programs with significant one-time equity grants, which is a common practice in the Chinese executive compensation market. This increased competition and the related new-hire offers of significant one-time equity grants, coupled with an already challenging market for executive talent, has created a pay gap for the Company’s leadership team as compared to the competitive market and has posed sig- nificant challenges to the Company’s ability to retain and motivate the Company’s visionary and entrepre- neurial leadership team. In 2019, four executive team members left the Company and joined startups or com- panies with new retail platforms preparing for overseas listing. The Compensation Committee believes that the Partner PSU Awards will help address the existing pay gap, are responsive to the compensation packages offered by this increased competition, including the practice of granting significant one-time equity grants, and are designed to create an entrepreneurial mindset. • Motivate Transformational Performance—The Com- pensation Committee determined that the special Part- ner PSU Awards were particularly important as the Company is at a strategic inflection point as it executes on its vision to become the world’s most innovative pioneer in the restaurant industry. Specifically, the Part- ner PSU Awards are designed to support the execution of the Company’s multi-year strategic operating plan, focusing on the transformation and reengineering of the Company’s strong casual dining businesses and expanding their monetization capabilities by deepening the connections with customers, suppliers, distributors and business partners via the Company’s end-to-end digital ecosystem. The Company believes that integrat- ing offline restaurants with online presence and its lead- ership in digital, data and delivery are crucial to building a transformational business model aimed at meeting the evolving needs of its customers. The Partner PSU Awards have been designed to incentivize an entrepre- neurial mindset and transformational performance that the Compensation Committee believes will contribute to business growth and exceptional shareholder value creation. • Encourage Long-Term Retention—Over the past sev- eral years, the Company has experienced a number of senior leadership changes. The Board is committed to building an organization with continuity in its leader- ship. In designing the award, the Compensation Com- mittee considered, the challenges associated with attracting and retaining high-quality leadership over the long-term to manage the complex- ities of the Company’s business. The Committee sought to structure an award that would incentivize longer- term retention. in particular, 52 YUM CHINA – 2020 Proxy Statement The Compensation Committee evaluated a number of alternatives to structure this special incentive in a way to address the pay gap as compared to the competitive mar- ket and to serve as a meaningful incentive for retention and the execution of the Company’s strategic operating plan. With advice from the Compensation Committee’s independent consultant, the Compensation Committee determined that the best way to retain key leaders for at least the next four years was to provide them with a com- pelling upside compensation opportunity, beyond the Company’s regular long-term incentive programs, that would motivate them to achieve the Company’s strategic priorities, including growth of the business and continued execution of innovation and strategy. These special grants are intended to provide value to the executive officers only if the Company successfully executes on its strategic operating plan, which the Compensation Committee believes will contribute to a significant increase in stock- holder value. Given the unique nature of these grants, the Compensation Committee has committed not to grant similar, special grants of performance units during the performance period, although award recipients will con- tinue to receive equity awards as part of the Company’s regular annual program. Accordingly, in February 2020, the Compensation Com- mittee approved the special long-term Partner PSU Awards to the continuing NEOs. On the grant date, Part- ner PSU Awards with an aggregate grant date fair value, assuming target performance, were granted to the con- tinuing NEOs as follows: Ms. Wat, $12,000,000; Mr. Yeung, $2,000,000; Mr. Huang, $2,000,000; Mr. Tan, $1,500,000; and Mr. Yuen, $1,500,000. Because these grants occurred in 2020, they represent 2020 com- pensation for SEC disclosure purposes and are not reflected in the 2019 Summary Compensation Table below. These long-term Partner PSU Awards will vest only if threshold performance goals relating to stock price (weighted 55%), Adjusted Total Revenue Growth (weighted 20%), Adjusted EBITDA Growth (weighted 15%) and transformational objectives (weighted 10%) are achieved over a four-year performance period, com- EXECUTIVE COMPENSATION mencing on January 1, 2020 and ending on December 31, 2023. Target vesting with respect to the stock price trigger will not occur unless the Company’s stock price is at least $80.00 measured as the trailing 60-day average closing price, with threshold vesting and maximum vesting occurring based on average stock prices equal to $60.00 and $100.00, respectively. The closing stock price on the date of grant was $42.71. The other performance goals were designed to be challenging but achievable with strong execution of the Company’s strategic operating plan. For context, Adjusted Total Revenue Growth and Adjusted EBITDA Growth are set at a compound annual growth rate (CAGR) over and above the strong perfor- mance accomplished in 2019, and are aligned with the Company’s long-term growth plan to drive value creation for stockholders. Based on performance, vesting may range from 0% to 200% of the target number of shares subject to the Partner PSU Awards. In designing the Partner PSU Awards, the Compensation Committee sought to align the interests of the recipients with the Company’s stockholders and to incentivize long- term stockholder value creation, resulting in the following features in the Partner PSU Award design: • 4-Year Performance and Vesting Period—Even if the performance goals are achieved prior to the expiration of the performance period, the Partner PSU Awards remain subject to service-based vesting through the expiration of the performance period. • Challenging Stock Price Targets—In order to receive target payout for the award, the stock price must almost double from the closing stock price on the date of grant and threshold payout requires a 40% increase in the stock price. • Payout Cap to Incentivize Stock Price Performance for Duration of Performance Period—In order to incentiv- ize stock price performance throughout the entire per- formance period, payout will be capped at target if the average stock price for the last 60 days of the perfor- mance period is below threshold, even if a higher stock price average was attained earlier in the performance period. P r o x y S t a t e m e n t YUM CHINA – 2020 Proxy Statement 53 EXECUTIVE COMPENSATION • Termination Provisions—The awards will generally vest pro rata based on actual performance through the end of the performance period in the event of termina- tion due to death, retirement, or termination without cause. In the event of a termination of employment by the Company without cause or by the award recipient due to good reason within two years following a change in control of the Company, the award will vest based on the greater of actual performance and target. • Compensation Recovery Policy—The Partner PSU Awards are subject to the Company’s Compensation Recovery Policy, which allows the Company to recover or cancel performance awards, such as the Partner PSU Awards. • Restrictive Covenants—The Partner PSU Awards also include non-competition and non-solicitation restrictive covenants. How Compensation Decisions Are Made Executive Compensation Philosophy A unique feature of the Company is that while it is regis- tered in the U.S. and listed on the NYSE, it operates largely in China. As a result, knowledge and expertise of both U.S. and China regulatory regimes and business practices are required for many of the Company’s execu- tive officers. Officer, and the Chief Legal Officer did not attend por- tions of the meetings relating to their own compensation. The Compensation Committee regularly conducts execu- tive sessions without management present. The Compen- sation Committee also engages in an ongoing dialog with its compensation consultant, the CEO, and the Chief Peo- ple Officer for the evaluation and establishment of the ele- ments of our executive compensation program. t n e m e t a t S y x o r P The Company’s executive compensation program has been designed to attract and retain the talent necessary to achieve superior stockholder results and support the long- term sustainable growth of the Company while simulta- to neously continuously achieve results year after year. In addition, the program has been designed to reward performance, emphasize long-term value creation and drive an owner- ship mentality. accountable executives holding our Role of the Compensation Committee The Compensation Committee reviews and approves goals and objectives relevant to the compensation of the CEO and other executive officers, sets the compensation levels of each of the executive officers, and together with the other independent directors of the Board, approves the compensation of the CEO. The Compensation Commit- tee’s responsibilities under its charter are further described in the “Governance of the Company” section of this Proxy Statement. While not members of the Compensation Committee, the CEO, the CFO, the Chief People Officer, and the Chief Legal Officer, when necessary, also attended meetings of the Compensation Committee in 2019 to contribute to and understand the Compensation Committee’s oversight of, and decisions relating to, exec- utive compensation. The CEO, the CFO, the Chief People 54 YUM CHINA – 2020 Proxy Statement Role of the Independent Consultant compensation, During 2019, the Compensation Committee retained Mercer (Hong Kong) Limited (“Mercer”) as its indepen- dent consultant to advise it on executive compensation matters. Mercer attended Compensation Committee meetings in 2019 and provided advice and guidance to the Compensation Committee on (i) the market competitive- ness of executive pay policies, practices and levels; (ii) the review of the long-term incentive plan; (iii) trends affect- ing executive including regulatory changes, institutional shareholder views, and develop- ments in the restaurant and food retail sector; (iv) peer group review; (v) equity compensation analytics and award valuation services; (vi) pay disclosures, including the CD&A; (vii) the Change in Control Severance Plan; and (viii) the Partner PSU Awards. The Compensation Committee has assessed the independence of Mercer pur- suant to NYSE rules and conflicts of interest specifically enumerated by the SEC’s six factors, and the Company has concluded that Mercer’s work for the Compensation Committee does not raise any conflicts of interest. The Compensation Committee annually reviews its relation- ship with Mercer and determines whether to renew the engagement. Only the Compensation Committee has the right to approve the services to be provided by, or to ter- minate the services of, its compensation consultant. EXECUTIVE COMPENSATION Competitive Market Review One of the key objectives of our executive compensation program is to retain and reward the right talent by provid- ing reasonable and competitive compensation. One method that the Compensation Committee utilizes to attain this objective is by establishing a group of peer companies for comparison of executive compensation practices. The peer group approved by the Compensation Commit- tee based on the recommendations of Mercer consisted of companies in the restaurant, food and consumer services industries in the United States, Greater China and Europe. In addition, Mercer suggested that, for purposes of bench- marking compensation levels for NEOs other than the CEO, the peer group data be supplemented with compen- sation survey data to provide a broader perspective on market practices. References in this CD&A to market data refer to the peer group or survey data, as appropriate. The executive compensation peer group used for evaluat- ing 2019 compensation decisions for the NEOs consisted of the companies below, which was the same peer group used to evaluate 2018 compensation decisions beginning September 27, 2018. Our peer group reflects a median market capitalization of $12.3 billion and median annual revenues of $8.2 billion, both as of June 30, 2019, and consists of 13 U.S. and 13 non-U.S. companies. Peer Group Aramark Corporation Chipotle Mexican Grill, Inc. Compass Group PLC Conagra Brands, Inc. Darden Restaurants, Inc. Domino’s Pizza, Inc. Hilton Worldwide Holdings Inc. Hyatt Hotels Corporation Lenovo Group Limited Link Real Estate Investment Trust Melco Resorts & Entertainment Limited Restaurant Brands International Inc. Sodexo S.A. Starbucks Corporation Techtronic Industries Company Limited The Gap, Inc. The Hershey Company Tingyi (Cayman Islands) Holding Corp. US Foods Holding Corp. Want Want China Holdings Limited WH Group Limited Whitbread PLC Wm Morrison Supermarkets PLC Wynn Macau, Limited X5 Retail Group N.V. YUM! Brands, Inc. P r o x y S t a t e m e n t Data from our 2019 peer group was supplemented by data from companies included in three executive compensa- tion surveys conducted by Mercer in China, Hong Kong, and the U.S., size adjusted to reflect the Company’s reve- the Compensation Committee nue. During 2019, reviewed a report summarizing compensation levels at the 25th, 50th and 75th percentiles of the peer group and, as applicable, of the survey data for positions comparable to our NEOs. The report compared target and actual total cash compensation (base salary and annual incentives) and total direct compensation (base salary plus annual incentives plus long-term incentives) for each of the NEOs against these benchmarks. The Compensation Committee also reviewed detailed tally sheets that cap- tured comprehensive compensation, benefits and stock ownership details. After considering the advice of Mercer, the Compensa- tion Committee approved a revised peer group for 2020 compensation decisions. The Compensation Committee added Haidilao International Holding Ltd. and McDo- nald’s Corporation to the revised peer group because these companies operate in the same industry and removed The Gap, Inc. because of its less relevant indus- try classification. YUM CHINA – 2020 Proxy Statement 55 be met in actual shares and/or immediate rights to shares) in a guideline amount set under the Stock Ownership Guidelines for the executive’s position. An executive must meet 100% of the applicable guideline within five years of becoming subject to the Stock Ownership Guidelines. The table below shows the value of shares (as a multiple of annual base salary) that must be owned by each continuing NEO. Each continuing NEO has satisfied as of the record date, or is expected to satisfy within the timeframe set forth in the Stock Ownership Guidelines, the applicable ownership multiple. NEO CEO . . . . . . . . . . . . . . . . . . . . . . . . . . . . CFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . General Manager, KFC . . . . . . . . . . . . Chief Supply Chain Officer . . . . . . . . . Chief People Officer . . . . . . . . . . . . . . . Multiple of Annual Base Salary 6X 3X 2X 2X 2X Hedging and Pledging of Company Stock Under the Company’s Code of Conduct, no employee or director is permitted to engage in securities transactions that would allow such employee or director either to insu- late himself or herself from, or profit from, a decline in the Company’s stock price. Similarly, no employee or direc- tor may enter into hedging transactions in Company stock. Such transactions include, without limitation, short sales as well as any hedging transactions in derivative securities (e.g., puts, calls, swaps or collars) or other spec- ulative transactions related to the Company’s stock. Pledging of Company stock by executive officers and directors is also prohibited. EXECUTIVE COMPENSATION Compensation Policies and Practices Compensation Recovery Policy Pursuant to the Company’s Compensation Recovery Pol- icy, in the event of any restatement of the Company’s financial statements due to material noncompliance with any financial reporting requirement under the securities laws, the Compensation Committee will recover or cancel any performance awards that were awarded to a current or former executive officer as a result of achieving perfor- mance targets that would not have been met under the restated results. The Company’s recovery authority applies to any performance award received by a current or former executive officer during the three most-recently completed fiscal years immediately preceding the date on which the Company is required to prepare the restate- ment. Under the terms of the policy, a performance award means any cash or equity-based award that is made, vests or is payable based wholly or in part on the results of a financial reporting measure. Equity-Based Awards Grant Policy The Company’s Equity-Based Awards Grant Policy pro- vides for certain procedures with respect to the granting of equity awards, including specifying pre-determined dates for annual and off-cycle grants and specifying that the Company will not purposely accelerate or delay the public release of material information in consideration of pend- ing equity grants. Generally, annual equity grants are effective as of the date that is two business days after the Company publicly discloses its results for the previous fiscal year. Stock Ownership Guidelines Under the Stock Ownership Guidelines, an executive is required to own a minimum value of shares (which may t n e m e t a t S y x o r P 56 YUM CHINA – 2020 Proxy Statement EXECUTIVE COMPENSATION COMPENSATION COMMITTEE REPORT The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with manage- ment. Based on such review and discussion with management, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by refer- ence in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Compensation Committee: Ruby Lu (Chair) Christian L. Campbell Edouard Ettedgui William Wang 2019 SUMMARY COMPENSATION TABLE The following table and footnotes summarize the total compensation awarded to, earned by or paid to the NEOs for fiscal year 2019 and, to the extent required by SEC executive compensation disclosure rules, fiscal years 2018 and 2017. The Company’s NEOs for the 2019 fiscal year are its Chief Executive Officer, Chief Financial Officer, the three other most highly compensated executive officers, its former Chief Financial Officer and Treasurer, and its former Chief Legal Officer and Corporate Secretary. P r o x y S t a t e m e n t Name and Principal Position Year Salary ($) Bonus ($)(1) Stock Awards ($)(2) Option/ SAR Awards ($)(3) Non-Equity Incentive Plan Compensation ($)(4) All Other Compensation ($)(5) Total ($)(6) Adjusted Total Compensation Without Legacy Tax Reimbursements ($)(7) Joey Wat . . . . . . . . . . . . . . . . . . 2019 1,180,667 2018 1,041,667 Chief Executive Officer 2017 — 2,500,031 2,500,012 — 2,500,032 2,516,929 739,858 200,000 2,000,021 1,139,167 4,355,208 1,635,469 1,904,782 1,634,083 2,792,279 1,583,655 12,170,001 10,486,376 7,567,483 10,900,805 8,035,756 6,288,915 Andy Yeung . . . . . . . . . . . . . . . . 2019 Chief Financial Officer 189,895 — 1,000,030 — 322,407 29,638 1,541,970 1,541,970 Johnson Huang . . . . . . . . . . . . 2019 2018 General Manager, KFC 2017 695,833 644,583 443,158 165,000 — 440,013 — 440,007 805,898 Danny Tan . . . . . . . . . . . . . . . . . 2019 2018 Chief Supply Chain Officer 624,689 592,990 — 380,023 — 380,015 440,007 440,011 379,722 380,013 380,005 1,682,635 866,775 975,762 1,313,575 554,218 386,480 453,540 280,672 666,369 1,338,085 3,644,968 2,844,916 3,050,212 3,364,669 3,245,313 3,466,790 2,602,846 2,958,208 2,956,605 2,163,936 512,527 99,552 228,005 228,010 882,224 193,251 2,143,569 2,107,840 Aiken Yuen . . . . . . . . . . . . . . . . 2019 Chief People Officer Jacky Lo . . . . . . . . . . . . . . . . . . . 2019 2018 Former Chief Financial Officer and Treasurer 2017 526,701 333,499 641,093 407,917 440,013 — 440,007 — 440,007 440,011 — 208,848 Shella Ng . . . . . . . . . . . . . . . . . . 2019 2018 Former Chief Legal Officer and Corporate Secretary 2017 300,035 231,701 344,604 416,184 — 300,040 396,058 179,663 1,007,342 300,001 300,002 379,722 742,068 501,482 657,261 83,438 336,226 533,331 261,216 352,315 291,305 2,393,064 1,108,542 1,240,914 2,743,504 2,374,908 1,565,331 3,652,843 2,460,994 3,757,030 2,648,582 2,173,418 1,422,027 1,388,474 1,524,780 2,686,348 YUM CHINA – 2020 Proxy Statement 57 EXECUTIVE COMPENSATION t n e m e t a t S y x o r P (1) (2) (3) The amounts reported in this column for 2019 represent a one-time discretionary payment to Mr. Lo, cash reten- tion awards paid to Mr. Yuen and Ms. Ng, and the guaranteed portion of Ms. Ng’s annual incentive award. The amounts reported in this column for 2019 represent the grant date fair value of the February RSU awards granted to Messrs. Huang, Tan, Yuen and Lo and Ms. Ng, the February PSU award granted to Ms. Wat, and the November RSU award granted to Mr. Yeung, calculated in accordance with Accounting Standards Codification Topic 718 (“ASC 718”), Compensation—Stock Compensation. The grant date fair value for the RSUs was calcu- lated by multiplying the number of RSUs granted by the closing stock price of a share of Company common stock on the date of grant. The per share fair value of the PSU award granted to Ms. Wat was calculated using a Monte- Carlo simulation model. Under ASC 718, the vesting condition related to Ms. Wat’s PSUs is considered a market condition and not a performance condition. Accordingly, there is no grant date fair value below or in excess of the amount reflected in the table above for Ms. Wat’s PSUs that could be calculated and disclosed based on achieve- ment of the underlying market condition. The amounts reported in this column for 2019 represent the grant date fair value of the annual SAR awards granted to each of the NEOs except for Mr. Yeung, calculated in accordance with ASC 718. To compute the grant date fair value of SAR awards, the Company uses the Black-Scholes model with the following assumptions: risk- free interest rate of 2.5%, expected term based on historical experience of 6.5 years, expected volatility of 32.0%, and expected dividend yield of 1.2%. See Note 14 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2019 (the “Audited Financial Statements”) for further discussion of the relevant assumptions used in calculating these amounts. (4) Amounts in this column reflect the annual incentive awards earned for the applicable fiscal year performance periods under the annual bonus program, which is described further in our CD&A under the heading “Annual Performance-Based Cash Bonuses.” For Ms. Ng, the amount reported represents the portion of her annual incen- tive award in excess of the guaranteed annual bonus of $89,342, which is reflected in the “Bonus” column of this table. (5) (6) (7) The amounts in this column for 2019 are detailed in the 2019 All Other Compensation Table and footnotes to that table, which follow. Certain compensation included in the All Other Compensation column was denominated in Chinese Renminbi. Mr. Lo and Ms. Ng’s salaries and Messrs. Tan and Yuen’s salaries and 2019 annual incentive and bonus awards were denominated in Hong Kong dollars. Compensation paid in Chinese Renminbi or Hong Kong dollars was converted to U.S. dollars using an exchange rate of 6.9211 and 7.8351, respectively, for disclosure purposes. The amounts in this column are calculated by subtracting the legacy tax reimbursements reflected in the 2019 All Other Compensation Table below from the “Total” column. As noted in the CD&A, prior to our spin-off from YUM, certain of our NEOs were offered tax equalization benefits as an element of their compensation. These tax equalization benefits represent a legacy compensation arrangement entered into while we were a subsidiary of our former parent. After the spin-off, the Compensation Committee began to phase out tax equalization benefits with respect to the continuing NEOs (other than certain grandfathered benefits pursuant to the legacy arrangements from YUM). We are providing this supplemental Total as we believe it better reflects the compensation decisions made by the Compensation Committee because the compensation received pursuant to the grandfathered tax reimbursements represent legacy contractual agreements entered into prior to the spin-off. The amounts reported in this column differ from, and are not a substitute for, the amounts reported in the “Total” column, as calculated pursuant to the Summary Compensation Table rules. 58 YUM CHINA – 2020 Proxy Statement EXECUTIVE COMPENSATION 2019 ALL OTHER COMPENSATION TABLE The following table and footnotes summarize the compensation and benefits included under the “All Other Compensa- tion” column in the 2019 Summary Compensation Table that were awarded to, earned by or paid to the Company’s NEOs for the fiscal year ended December 31, 2019. Name (a) Ms. Wat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mr. Yeung . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mr. Huang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mr. Tan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mr. Yuen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mr. Lo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ms. Ng . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Perquisites and Other Personal Benefits ($)(1) (b) Tax Reimbursements ($)(2) (c) Retirement Scheme Contributions ($)(3) (d) Other ($)(4) (e) Total ($) (f) 139,324 15,141 112,879 164,280 88,332 75,855 81,851 1,269,196 118,086 107,477 1,634,083 — 178,178 408,064 35,729 94,922 2,264,369 9,497 69,605 62,469 51,253 26,335 23,170 5,000 25,818 31,556 17,937 64,104 23,674 29,638 386,480 666,369 193,251 261,216 2,393,064 (1) Amounts in this column represent: for Ms. Wat, an education reimbursement ($43,008) and housing cost subsidy ($96,316); for Messrs. Yeung, Huang, Yuen and Lo and Ms. Ng, a housing cost subsidy; and for Mr. Tan, an edu- cation reimbursement ($41,178) and housing cost subsidy ($123,102). Such amounts are valued based on the amounts paid directly to the NEOs or the service providers, as applicable. (2) Amounts in this column for Messrs. Huang, Tan, Yuen and Lo represent legacy tax reimbursements for gains realized in 2019 on equity awards granted before 2018. For Ms. Wat, the amount consists of legacy tax reim- bursements for the following: (i) exercise of Yum! Brands, Inc. SARs ($763,780); (ii) vesting of Company RSUs granted prior to 2018 ($358,642); (iii) a portion of Ms. Wat’s 2018 annual cash bonus for the period prior to the elimination of the associated tax reimbursement ($112,732); and (iv) a portion of Ms. Wat’s mobility premium for the period prior to the elimination of the associated tax reimbursement ($34,042). The amount in this column for Ms. Ng represents legacy tax reimbursements for salary, cash bonus and gains realized in 2019 on equity awards granted before 2018. P r o x y S t a t e m e n t (3) This column represents contributions to the BSRCHLRS for all of our NEOs. (4) This column reports the total amount of other benefits provided. Such amounts, which are reflective of market practice for similarly situated global executives working in international companies based in mainland China, are paid directly to the NEOs or service providers, as applicable. Other than for certain benefits described below, none of the other benefits individually exceeded the greater of $25,000 or 10% of the total amount of these other bene- fits and the perquisites and other personal benefits shown in column (b) for the NEO. These other benefits consist of amounts paid for utilities, home leave expenses, transportation allowances, club memberships, repatriation expense reimbursement, executive physicals and mobility premiums. In 2019, Ms. Wat received home leave reimbursement of $30,994 and a mobility premium of $42,333, and Mr. Lo received payment of $35,778 for accrued but unused annual leave upon his departure. YUM CHINA – 2020 Proxy Statement 59 EXECUTIVE COMPENSATION 2019 GRANTS OF PLAN-BASED AWARDS The following table provides information on the annual incentive program that the Company’s NEOs participated in during 2019 and the SARs, RSUs and PSUs granted in 2019 to the Company’s NEOs. Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1) Target ($) (d) Threshold ($) (c) Maximum ($) (e) Estimated Future Payouts Under Equity Incentive Plan Awards(2) Target (#) (g) Threshold (#) (f) Maximum (#) (h) All Other Stock Awards: Number of Shares of Stock or Units (#)(3) (i) All Other Option/ SAR Awards: Number of Securities Underlying Options (#)(4) (j) Exercise or Base Price of Option/ SAR Awards ($/Sh)(5) (k) Grant Date Fair Value of Stock, Option and SAR Awards ($)(6) (l) — — — — — — — — — — — — — — — — — — — — — 1,544,400 4,633,200 — — — 14,691 — — — — 41,975 — — 83,950 — — — — 186,100 — 142,911 — 428,733 — 589,055 1,767,164 — — — — 499,079 1,497,236 — — — — 335,192 1,005,575 — — — — 500,249 1,500,747 — — — — 279,542 — — 838,626 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 24,132 — — 10,562 — — 9,122 — — 5,473 — — 10,562 — — 7,202 — — — 32,754 — — 28,288 — — 16,973 — — 32,754 — — 22,332 — — 41.66 — — — — 41.66 — — 41.66 — — 41.66 — — 41.66 — — 41.66 — — 2,500,012 2,500,031 — 1,000,030 — 440,007 440,013 — 380,013 380,023 — 228,010 228,005 — 440,007 440,013 — 300,001 300,035 Name (a) Ms. Wat . . . . . Grant Date (b) — 2/7/2019 2/7/2019 Mr. Yeung . . . — 11/1/2019 Mr. Huang . . Mr. Tan . . . . . Mr. Yuen . . . . Mr. Lo . . . . . . Ms. Ng . . . . . — 2/7/2019 2/7/2019 — 2/7/2019 2/7/2019 — 2/7/2019 2/7/2019 — 2/7/2019 2/7/2019 — 2/7/2019 2/7/2019 t n e m e t a t S y x o r P (1) Amounts in columns (c), (d) and (e) provide the minimum, target and maximum amounts payable as annual incentive compensation to each NEO based on team and individual performance during 2019. Mr. Yeung’s mini- mum, target and maximum amounts are prorated for his period of service to the Company in 2019. The actual amounts of annual incentive compensation awards paid for 2019 performance are shown in the “Non-Equity Incentive Plan Compensation” column of the 2019 Summary Compensation Table. The performance measure- ments, performance targets and target bonus percentages are described in the CD&A, beginning under the head- ing “Annual Performance-Based Cash Bonuses.” (2) Amounts in columns (f), (g) and (h) provide the threshold, target and maximum numbers of shares of common stock that may be received by the grantee upon vesting of PSUs. The PSUs granted to Ms. Wat on February 7, 2019 will be settled in shares of common stock, subject to (i) the attainment of an r-TSR performance goal based on the Company’s r-TSR performance relative to a peer group and measured over the 2019–2021 performance period and (ii) Ms. Wat’s continued employment through the end of the performance period. Amounts reported in the “Threshold” column represent payout of 35% of the target PSUs awarded and require a 30% r-TSR percentile ranking to be achieved, and amounts reported in the “Maximum” column represent payout of 200% of the target PSUs awarded and require the Company’s r-TSR percentile ranking to be 85% or higher. 60 YUM CHINA – 2020 Proxy Statement EXECUTIVE COMPENSATION (3) (4) RSUs allow the grantee to receive the number of shares of the underlying common stock subject to the award upon vesting. The RSUs granted on February 7, 2019 vest 100% on the third anniversary of the grant date, subject to the recipient’s continued employment through the vesting date. The RSUs granted to Mr. Yeung on November 1, 2019 vest in equal installments on the first, second and third anniversaries of the grant date, subject to Mr. Yeung’s continued employment through the applicable vesting date. During the vesting period, the RSUs will be adjusted to reflect the accrual of dividend equivalents, which will be distributed as additional Company shares at the same time and to the extent the underlying shares vest. SARs allow the grantee to receive the number of shares of the underlying common stock that is equal in value to the appreciation in the underlying common stock with respect to the number of SARs granted from the date of grant to the date of exercise. SARs become exercisable in equal installments on the first, second, third and fourth anniversaries of the grant date, subject to the recipient’s continued employment through the applicable vesting date. (5) The exercise price of the SARs equals the closing price of the underlying common stock on the grant date. (6) The amounts reported in this column for 2019 represent the grant date fair value of the annual SAR awards granted to each of the NEOs other than Mr. Yeung, the RSU awards granted to each of the NEOs other than Ms. Wat, and the PSU award granted to Ms. Wat, calculated in accordance with ASC 718. To compute the grant date fair value of SAR awards, the Company uses the Black-Scholes model with the following assumptions: risk- free interest rate of 2.5%, expected term based on historical experience of 6.5 years, expected volatility of 32.0%, and expected dividend yield of 1.2%. See Note 14 to the Company’s Audited Financial Statements for further dis- cussion of the relevant assumptions used in calculating the grant date fair value for the SARs. The grant date fair value of the RSUs was determined based on the closing stock price of a share of Company common stock on the date of grant. The per share fair value of the PSUs granted to Ms. Wat was determined based upon a Monte Carlo simulation model. P r o x y S t a t e m e n t YUM CHINA – 2020 Proxy Statement 61 EXECUTIVE COMPENSATION OUTSTANDING EQUITY AWARDS AT 2019 YEAR-END The following table shows the number of Company shares covered by exercisable and unexercisable SARs, RSUs and PSUs held by the Company’s NEOs on December 31, 2019. This table excludes any YUM shares received by the NEOs upon conversion of their outstanding YUM equity awards in connection with the spin-off. Option/SAR Awards Stock Awards t n e m e t a t S y x o r P Name (a) Ms. Wat . . . . . . Number of Securities Underlying Unexercised Options/ SARs (#) Exercisable (c) 27,063 32,309 30,987 36,634 55,887 46,537 — Grant Date (b) 2/6/2015 3/25/2015 2/5/2016 11/11/2016 2/10/2017 2/9/2018 2/7/2019 Mr. Yeung . . . . 11/1/2019 Mr. Huang . . . . Mr. Tan . . . . . . . Mr. Yuen . . . . . 2/8/2012 2/6/2013 2/5/2014 2/5/2014 2/6/2015 2/5/2016 11/11/2016 2/10/2017 11/1/2017 2/9/2018 2/7/2019 2/4/2011 2/8/2012 2/6/2013 2/5/2014 2/5/2014 2/6/2015 2/5/2016 11/11/2016 2/10/2017 2/9/2018 2/7/2019 2/4/2011 2/8/2012 2/6/2013 2/5/2014 2/6/2015 2/6/2015 2/5/2016 2/10/2017 2/9/2018 2/7/2019 — 8,994 9,652 6,797 9,516 10,149 10,329 18,317 18,629 — 8,135 — 7,033 3,679 7,556 6,797 7,681 10,149 10,329 18,317 18,629 7,026 — 2,713 2,290 3,591 3,602 4,060 4,060 3,460 5,682 4,215 — 62 YUM CHINA – 2020 Proxy Statement Number of Securities Underlying Unexercised Options/ SARs (#) Unexercisable(1) (d) — — 10,329(i) 12,212(ii) 55,887(iii) 139,614(iv) 186,100(v) — — — — — — 3,443(i) 6,106(ii) 18,629(iii) — 24,408(iv) 32,754(v) — — — — — — 3,443(i) 6,106(ii) 18,629(iii) 21,079(iv) 28,288(v) — — — — — — 1,154(i) 5,682(iii) 12,648(iv) 16,973(v) Option/ SAR Exercise Price ($) (e) 22.32 23.90 21.06 26.98 26.56 40.29 41.66 Option/ SAR Expiration Date (f) 2/6/2025 3/25/2025 2/5/2026 11/11/2026 2/10/2027 2/9/2028 2/7/2029 Number of Shares or Units of Stock That Have Not Vested (#)(2) (g) Market Value of Shares or Units of Stock That Have Not Vested ($)(3) (h) — — — — 77,163(i) — — — — — — 3,704,613 — — Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(4) (i) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(3) (j) — — — — — 59,881(i) 41,975(ii) — — — — — 2,874,887 2,015,220 — 19.46 19.00 21.30 21.30 22.32 21.06 26.98 26.56 — 40.29 41.66 14,88 19.46 19.00 21.30 21.30 22.32 21.06 26.98 26.56 40.29 41.66 14,88 19.46 19.00 21.30 22.32 22.32 21.06 26.56 40.29 41.66 — 24,193(ii) 1,161,489 2/8/2022 2/6/2023 2/5/2024 2/5/2024 2/6/2025 2/5/2026 11/11/2026 2/10/2027 — 2/9/2028 2/7/2029 2/4/2021 2/8/2022 2/6/2023 2/5/2024 2/5/2024 2/6/2025 2/5/2026 11/11/2026 2/10/2027 2/9/2028 2/7/2029 2/4/2021 2/8/2022 2/6/2023 2/5/2024 2/6/2025 2/6/2025 2/5/2026 2/10/2027 2/9/2028 2/7/2029 — — — — — — — — 20,702(iii) 11,164(iv) 10,677(v) — — — — — — — — — 9,642(iv) 9,221(v) — — — — — — — — 5,785(iv) 5,532(v) — — — — — — — — 993,921 535,974 512,579 — — — — — — — — — 462,898 442,695 — — — — — — — — 277,729 265,607 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — EXECUTIVE COMPENSATION (1) The actual vesting dates for unexercisable SARs are as follows: (i) Remainder of the unexercisable award vested on February 5, 2020. (ii) Remainder of the unexercisable award will vest on November 11, 2020. (iii) One-half of the unexercisable award vested or will vest on each of February 10, 2020 and 2021. (iv) One-third of the unexercisable award vested or will vest on each of February 9, 2020, 2021 and 2022. (v) One-fourth of the unexercisable award vested or will vest on each of February 7, 2020, 2021, 2022 and 2023. (2) The RSUs reported in this column include additional RSUs received with respect to dividend equivalents, which remain subject to the same underlying vesting conditions. The actual vesting dates for unvested RSUs are as fol- lows: (i) The RSUs will vest in full on February 10, 2021. (ii) One-third of the RSUs will vest on each of November 1, 2020, 2021 and 2022. (iii) The RSUs will vest in full on November 1, 2021. (iv) The RSUs will vest in full on February 9, 2021. (v) The RSUs will vest in full on February 7, 2022. P r o x y S t a t e m e n t (3) (4) The market value of each award is calculated by multiplying the number of shares covered by the award by $48.01, the closing price of the Company’s stock on the NYSE on December 31, 2019. The awards reported in this column represent PSU awards with three-year performance periods that are scheduled to be settled in shares of common stock, subject to the attainment of the r-TSR performance goal over the applica- ble performance period. In accordance with the SEC executive compensation disclosure rules, the amounts reported for Ms. Wat’s PSU awards are based on the target performance level. The actual vesting dates for unvested PSUs are as follows, subject to the attainment of the applicable performance goal: (i) The PSUs will vest in full on December 31, 2020. (ii) The PSUs will vest in full on December 31, 2021. YUM CHINA – 2020 Proxy Statement 63 EXECUTIVE COMPENSATION 2019 OPTION/SAR EXERCISES AND STOCK VESTED The table below shows the number of Company shares acquired during 2019 upon the exercise of Company SAR awards and the vesting of Company stock awards and before payment of applicable withholding taxes and broker com- missions. This table does not include any shares acquired upon the exercise or vesting of outstanding YUM equity awards. Name (a) Ms. Wat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mr. Yeung . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mr. Huang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mr. Tan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mr. Yuen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mr. Lo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ms. Ng . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonqualified Deferred Compensation Option/SAR Awards Number of Shares Acquired on Exercise (#) (b) Value Realized on Exercise ($) (c) Stock Awards Number of Shares Acquired on Vesting (#) (d) Value Realized on Vesting ($) (e) — — — 7,502 2,081 4,911 48,791 — — — 307,606 91,702 217,006 18,977 — 14,241 14,241 — 445 2,093,895 20,693 734,637 — 527,999 527,999 — 20,292 795,387 The Company offers certain executives working in China retirement benefits under the BSRCHLRS. Under this program, executives may make personal contributions and the Company provides a company-funded contribu- tion ranging from 5% to 10% of an executive’s base sal- ary. In 2019, Mr. Tan and Ms. Ng made personal contributions to the BSRCHLRS equal to 5% and 10% of base salary, respectively. The Company’s contributions for 2019 were equal to 5% of salary for Messrs. Yeung and Lo and 10% of salary for each of Mses. Wat and Ng and Messrs. Huang, Tan and Yuen. Participants may elect a variety of mutual funds in which to invest their account balances under the plan. Additionally, upon termination, participants receive a lump sum equal to a percentage of the Company’s contributions, including investment returns. This percentage is based on a vesting schedule that provides participants with a vested 30% interest upon completion of a minimum of three years of service, and an additional 10% vested interest for each additional com- pleted year, up to a maximum of 100%. In connection with their departures in 2019, Ms. Ng received a 100% lump sum distribution from the BSRCHLRS, while Mr. Lo received a 30% lump sum distribution from the BSRCHLRS and forfeited the remaining 70%. t n e m e t a t S y x o r P 64 YUM CHINA – 2020 Proxy Statement EXECUTIVE COMPENSATION 2019 NONQUALIFIED DEFERRED COMPENSATION TABLE Name Executive Contributions in Last Fiscal Year ($)(1) (a) Registrant Contributions in Last Fiscal Year ($)(2) (b) Aggregate Earnings in Last Fiscal Year ($)(3) (c) Aggregate Withdrawals/ Distributions ($)(4) (d) Ms. Wat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mr. Yeung . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mr. Huang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mr. Tan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mr. Yuen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mr. Lo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ms. Ng . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 31,234 — — 23,170 118,086 9,497 69,605 62,469 51,253 26,335 23,170 — — — — — — — — — — — — 25,347 553,757 Aggregate Balance at Last Fiscal Year End ($)(5) (e) 321,569(6) 9,497(6) 349,257(6) 326,441(6) 230,694(6) —(6) —(6) (1) Amounts in this column reflect Mr. Tan’s and Ms. Ng’s personal contributions to the BSRCHLRS with respect to 2019. (2) Amounts in this column reflect registrant contributions to the BSRCHLRS for the NEOs and which are reflected in the 2019 Summary Compensation Table. (3) Under the Hong Kong Data Privacy Act, the administrator of the BSRCHLRS is restricted from disclosing indi- vidual account balances under the BSRCHLRS, and accordingly, the Company is unable to compile earnings information with respect to the BSRCHLRS. Under the terms of the BSRCHLRS, participants may elect a variety of mutual funds in which to invest their account balances under the BSRCHLRS. (4) Mr. Lo and Ms. Ng received distributions of their accounts under the BSRCHLRS in 2019. However, the Com- pany is unable to provide the actual amounts of the distributions because under the Hong Kong Data Privacy Act, the administrator of the BSRCHLRS is restricted from disclosing amounts of distributions from individual accounts. The amounts in this column reported represent the estimated distribution Mr. Lo and Ms. Ng received from BSRCHLRS in connection with their departures in 2019. P r o x y S t a t e m e n t (5) The amounts reflected in this column are the estimated year-end balances for the NEOs under the BSRCHLRS. (6) This amount represents the aggregate amount of Company contributions, excluding investment returns. See note (3) to this table for further information regarding investment returns with respect to the BSRCHLRS. This amount was denominated in Hong Kong dollars and was converted to U.S. dollars using an exchange rate of 7.8351 Hong Kong dollars to U.S. dollars for disclosure purposes. Potential Payments upon a Termination or a Change in Control Termination of Employment without a Change in Control. As of December 31, 2019, except with respect to Ms. Wat and Mr. Yeung, the Company did not have a general severance plan or pre-established severance agreements with its NEOs that provide for separation benefits upon a termination other than in connection with a change in control. On February 26, 2020, the Committee authorized the entry into Restrictive Covenant Letter Agreements with the NEOs. The Restrictive Covenant Letter Agreements include restrictive covenants relating YUM CHINA – 2020 Proxy Statement 65 EXECUTIVE COMPENSATION to non-disclosure, non-competition, non-solicitation and non-disparagement, as well as cooperation in investiga- tions and litigation clauses. As consideration for the restrictive covenants, the Company is obligated to pay an amount equivalent to five times the NEO’s average monthly salary upon a termination of employment, other than in the case of a change-in-control-related termination or the NEO’s death. Such amount is offset by amounts otherwise owed under any other termination-related agreement between the employee and the Company (including the agreements described below for Ms. Wat and Mr. Yeung) so that there is no duplication of pay- ments. As of December 31, 2019, Ms. Wat was party to an indi- vidual agreement with the Company, which provided that if Ms. Wat’s employment is terminated by the Company without “cause” prior to March 1, 2021, then Ms. Wat will be entitled to a severance payment ($5,464,800), payable in monthly installments, equal to two times her annual base salary and annual bonus target, subject to Ms. Wat’s execution of a post-termination agreement that includes non-solicitation, restrictive relating non-competition and non-disclosure. In the event Ms. Wat becomes eligible for benefits under the Change in Control Severance Plan, such benefits would be paid in lieu of any amounts under her letter agreement. covenants to As of December 31, 2019, Mr. Yeung was party to a letter agreement with the Company, which provided that if Mr. Yeung’s employment is terminated by the Company without “cause,” the Company will pay Mr. Yeung a lump sum payment ($270,833) equal to five times his average monthly base salary during the 12-month period prior this payment, Mr. Yeung must comply with certain non-competition restrictive covenants for one year following his termina- tion of employment. to termination. In return for t n e m e t a t S y x o r P minated as of December 31, 2019 without cause or due to death, they would have been entitled to pro-rata vesting of their outstanding RSUs, SARs and, in the case of Ms. Wat, PSUs, as follows: Ms. Wat, $8,655,159; Mr. Yeung, $64,527; Mr. Huang, $1,432,254; Mr. Tan, $811,488; and Mr. Yuen, $397,498. As of December 31, 2019, Messrs. Huang and Yuen were retirement eligible. Termination of Employment Following a Change in Control. As noted in the CD&A, during 2019, the Board adopted the Change in Control Severance Plan, which provides severance benefits to our continuing NEOs in the event of a termination of employment by the Company without “cause” or by the NEO due to “good reason,” in each case within 24 months following a change in control. Each participating NEO has executed a participation and restrictive covenant agreement to participate in the Change in Control Severance Plan, which contains restrictive covenants in favor of the Company relating to non-competition, non-solicitation, non-disclosure, and non-disparagement. In the event of a Qualifying Termi- nation under the Change in Control Severance Plan, the NEO would receive, in lieu of any severance benefits under any other arrangement with the participant, the fol- lowing severance benefits: • An amount equal to the “Severance Multiple” multi- plied by the sum of (x) such NEO’s monthly base salary in effect immediately prior to a Qualifying Termination (or prior to any reduction for purposes of good reason) and (y) 1/12 of the greater of such NEO’s annual target cash bonus for the calendar year in which the Qualify- ing Termination occurs and the most recent annual cash bonus paid to the NEO, with such amounts payable over the 12-month period following the NEO’s termi- nation of employment. The Severance Multiple is 30 for the CEO and 24 for each of the other participating NEOs. The Company’s equity awards provide for pro-rata vest- ing for terminations due to death, retirement (age 55 and ten years of service or age 65 and five years of service) or involuntary termination by the Company without cause, with PSUs determined based on actual performance. Out- standing equity awards are forfeited upon a termination for cause. If the continuing NEOs’ employment had ter- • Any accrued, but unpaid as of the date of the Qualifying Termination, annual cash bonus for any completed fis- cal year preceding a Qualifying Termination, to be paid within 60 days of the Qualifying Termination. • Accrued benefits under any retirement plan or health or welfare plan. 66 YUM CHINA – 2020 Proxy Statement EXECUTIVE COMPENSATION Under the terms of our equity agreements, all outstanding SARs, RSUs and PSUs would fully and immediately vest following a change in control of the Company if the exec- utive is employed on the date of the change in control and is involuntarily terminated (other than for cause) on or within two years following the change in control, with performance measured through the date of termination and subject to proration for time served during the perfor- mance period in the case of the PSUs. • If permitted by the terms of the Company’s health plan and applicable law, continued health insurance cover- age, subsidized by the Company at active employee rates, through the earlier of the one-year anniversary of the participant’s termination of employment and the participant becoming eligible for health insurance cov- erage under another employer’s plan. • Outplacement services, in an aggregate cost to the Company not to exceed $25,000, for a one-year period (or, if earlier, until the NEO accepts an offer of employ- ment). The below table shows the maximum amount of payments and other benefits that each NEO would have received upon a change in control and qualifying termination on December 31, 2019 under the terms of the Change in Control Severance Plan and the Company’s equity award agreements. P r o x y S t a t e m e n t Cash Severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Continued Health Insurance Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outplacement Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accelerated Vesting of SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accelerated Vesting of RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accelerated Vesting of PSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wat $ 7,058,673 18,522 25,000 3,993,516 3,704,613 4,506,329 Yeung $ 2,275,000 11,296 25,000 Huang $ 3,133,550 11,296 25,000 — 1,017,208 2,042,474 — 1,161,489 — Tan $ 2,368,436 17,429 25,000 963,149 905,593 — Yuen $ 1,814,395 12,300 25,000 358,400 543,336 — TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,306,653 3,472,785 6,229,528 4,279,607 2,753,431 In addition, if a change in control of the Company had occurred as of December 31, 2019, the following NEOs would have been entitled to receive accelerated vesting of their YUM SARs, with the value of such awards as fol- lows: Ms. Wat, $526,991; Mr. Huang, $175,681; Mr. Tan, $175,681; and Mr. Yuen, $58,884. Arrangements with Mr. Lo and Ms. Ng and reimbursement for up to $5,000 of repatriation expenses. Mr. Lo had 90 days from the date of his depar- ture to exercise his vested SARs, and all of his unvested equity awards were forfeited upon his departure. The Lo Termination Agreement provides for restrictive cove- nants to non-competition, non-solicitation, non-disparagement, and non-disclosure. the Company relating favor of in As noted above, we may from time-to-time offer a sever- ance benefit arrangement for a terminated executive as part of a negotiated termination of employment. In con- nection with their departures, the Company entered into a separation agreement with Mr. Lo (the “Lo Termination Agreement”) and a separation agreement with Ms. Ng (the “Ng Term Agreement”). Under the Lo Termination Agreement, the Company agreed to pay Mr. Lo his prorated 2019 annual cash bonus ($742,068), which became payable at the same time that the 2019 annual cash bonuses were paid to the other NEOs, a one-time discretionary payment ($333,499), payment for accrued but unused annual leave ($35,778), Under the Ng Term Agreement, Ms. Ng agreed to serve as Senior Consultant to the Company from May 1, 2019 to November 30, 2019. In consideration for her services in such capacity, Ms. Ng was paid monthly compensation of HK$100,000 (US$12,763, based on the exchange rate of 7.8351 HK$ to US$) and a monthly transportation allow- ance of RMB 10,000 (US$1,445, based on the exchange rate of 6.9211 RMB to US$), continued to participate in certain Company employee benefit plans, received con- tinued vesting of her outstanding equity awards through November 30, 2019, and (subject to continued compli- ance with the terms of the Ng Term Agreement) received a one-time cash bonus for the period of January 1, 2019 to through April 30, 2019 in an amount equal YUM CHINA – 2020 Proxy Statement 67 t n e m e t a t S y x o r P EXECUTIVE COMPENSATION HK$700,000, or US$89,342, based on the exchange rate of 7.8351 HK$ to US$, paid in December 2019, plus the positive difference between such amount and the actual prorated bonus earned under the annual incentive plan, if any ($83,438, paid at the time that the annual incentives were paid to the other NEOs). Pursuant to certain grand- fathered arrangements, Ms. Ng’s monthly compensation and transportation allowance as Senior Consultant, PAY RATIO DISCLOSURE As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Com- pany is providing the following disclosure about the rela- tionship of total compensation of our employees to the annual total compensation of Ms. Wat. the annual Identification of Median Pay Employee The Company employed approximately 450,000 persons as of year-end 2019, and substantially all of them are based in China. Given the nature of its operations, approximately 90% of the Company’s employees were restaurant crewmembers. More than 76% of the crew- members worked part-time, approximately 49% of whom attended university at the same time, and were paid on an hourly basis. Our wage rates for crewmembers are deter- mined based on a number of factors, including but not limited to cost of living, labor supply and demand, and competitive market pay rates in the city in which the crewmember works. We selected December 31, 2019, as the date on which to determine our median employee. For purposes of identi- fying the median employee from the employee population base (excluding Ms. Wat), we considered the total com- pensation of all of our employees, as compiled from our payroll records. In addition, we measured compensation for purposes of determining the median employee using December 2019 payroll records. Compensation paid in foreign currencies was converted to U.S. dollars based on a weighted average exchange rate for the relevant period. Using this methodology, our median employee was iden- tified as a part-time crewmember attending university and located in a second-tier city in China. 68 YUM CHINA – 2020 Proxy Statement one-time bonus, gains realized from the exercise of SARs granted prior to 2018, and income realized upon the vest- ing of RSUs granted prior to 2018 were all subject to tax equalization (totaling $2,264,369). The Ng Term Agree- ment provides for restrictive covenants in favor of the Company relating to non-competition, non-solicitation, non-disparagement and non-disclosure. Ratio For 2019, • The annual total compensation of the median employee, as identified above, was $4,161. • Ms. Wat’s annual total compensation, as reported in the Total column of the 2019 Summary Compensation Table, was $ 12,170,001. • Based on this information, the ratio of the annual total compensation of Ms. Wat to the median of the annual total compensation of all employees is approximately 2,925 to 1. Our pay ratio is significantly impacted by the fact that substantially all of our employees are based in China, approximately 76% of our over 410,000 crewmembers are employed on a part-time and hourly basis, and typical wages vary between the cities in which our restaurants are located. The above ratio and annual total compensation amount of the median employee are reasonable estimates that have been calculated using methodologies and assumptions permitted by SEC rules. The ratio and annual total com- pensation amount may not be directly comparable to those of other companies because the methodologies and assumptions used to identify the median employee may vary significantly among companies. 2019 DIRECTOR COMPENSATION The Company primarily uses stock-based compensation to attract and retain qualified candidates to serve on the Board. In setting director compensation, the Board con- siders the significant amount of time that directors expend in fulfilling their duties to the Company as well as the skill level required by the Company of members of the Board. The Nominating and Governance Committee of the Board considers advice from the compensation consultant and reviews and makes recommendations to the Board with respect to the compensation and benefits of directors on an annual basis. The Company’s director compensa- tion structure for 2019 is discussed below. Non-Employee Directors Retainer. Our non-employee directors were each compensated with an annual retainer equal to $275,000, payable in Company common stock or, if requested by a director, up to one-half in cash. The annual retainers were paid in June 2019 to compensate the directors for their services from June 1, 2019 to May 31, 2020. to the paid retainer Chairman and Committee Chairperson Retainer. In addition to annual all non-employee directors, the Chairman of the Board (Dr. Hu) received an additional annual cash retainer of $225,000. The Chairperson of the Audit Committee (Mr. Campbell) received an additional $30,000 stock retainer, the Chairperson of the Compensation Committee (Ms. Lu) received an additional $20,000 stock retainer, the Chairperson of the Nominating and Governance Committee (Dr. Hu) received an additional $15,000 stock retainer, and the Chairperson of the Food Safety Commit- tee (Mr. Shao) received an additional $15,000 stock retainer. All such retainers were paid in June 2019 to compensate the directors for their services from June 1, 2019 to May 31, 2020. Employee Directors. Employee directors do not receive additional compensation for serving on the Board of Directors. P r o x y S t a t e m e n t The table below summarizes cash compensation earned by and stock retainers granted to each non-employee director during 2019. Name (a) Peter A. Bassi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Christian L. Campbell . . . . . . . . . . . . . . . . . . . . . . . . . . . Cyril Han(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ed Yiu-Cheong Chan . . . . . . . . . . . . . . . . . . . . . . . . . . . . Edouard Ettedgui . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louis T. Hsieh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fred Hu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ruby Lu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Zili Shao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . William Wang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jonathan S. Linen(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fees Earned or Paid in Cash($)(1) (b) Stock Awards ($)(2) (c) 137,500 — — 80,208 — 80,208 225,000 — — — — 137,500 305,000 275,000 137,500 275,000 137,500 290,000 295,000 290,000 275,000 — Total ($) (d) 275,000 305,000 275,000 217,708 275,000 217,708 515,000 295,000 290,000 275,000 — (1) Represents the portion of the annual retainer that the director elected to receive in cash rather than equity with respect to Messrs. Bassi, Chan and Hsieh, cash fees received in lieu of fractional shares by Messrs. Campbell, Ettedgui, Han, Shao and Wang and Ms. Lu, and the annual cash retainer paid to Dr. Hu as Chairman of the Board. YUM CHINA – 2020 Proxy Statement 69 2019 DIRECTOR COMPENSATION (2) Represents the grant date fair value for annual stock retainer awards granted in 2019. Each director received shares of Company common stock determined by dividing the applicable annual retainer by the closing market price of a share of Company common stock on the date of grant, with any fractional shares paid in cash rather than equity. (3) Mr. Han was first elected to the Board at the 2019 Annual Meeting of Stockholders. (4) In accordance with the Board’s retirement policy, Mr. Linen did not stand for reelection at the 2019 Annual Meet- ing of Stockholders. While Mr. Linen served as a director during 2019, he did not receive any compensation in 2019 with respect to such service, as his 2018 equity grant that was reported in the 2018 Director Compensation Table represented compensation for his service until May 2019. Stock Ownership Requirements. Although our direc- tors are not subject to the Stock Ownership Guidelines, we nevertheless expect our directors to own a meaningful number of shares of Company common stock, and we have a share retention policy in place for directors. Pursu- ant to the share retention policy, no director may sell any shares received as director compensation until at least 12 months following the director’s retirement or departure from the Board. t n e m e t a t S y x o r P 70 YUM CHINA – 2020 Proxy Statement EQUITY COMPENSATION PLAN INFORMATION The following table summarizes, as of December 31, 2019, the equity compensation we may issue to our directors, offi- cers, employees and other persons under the Company’s Long Term Incentive Plan (the “LTIP”), which was approved by YUM as the Company’s sole stockholder prior to the Company’s spin-off from YUM. Plan Category Equity compensation plans approved by security Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights (b) Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,361,706(1) 24.22(2) 16,111,651(3) Equity compensation plans not approved by security holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,361,706 — 24.22 — 16,111,651 (1) Includes 989,058 shares issuable in respect of restricted stock units and performance share units. (2) Restricted stock units and performance share units do not have an exercise price. Accordingly, this amount repre- sents the weighted-average exercise price of outstanding stock appreciation rights and stock options. (3) After the spin-off, full value awards granted to the Company’s employees under the LTIP, including restricted stock units and performance share units, will reduce the number of shares available for issuance by two shares. Stock appreciation rights granted to the Company’s employees under the LTIP will reduce the number of shares available for issuance only by one share. P r o x y S t a t e m e n t YUM CHINA – 2020 Proxy Statement 71 AUDIT COMMITTEE REPORT Who serves on the Audit Committee of the Board of Directors? The members of the Audit Committee are Christian L. Campbell (Chair), Peter A. Bassi, Ed Yiu-Cheong Chan, Cyril Han and Louis T. Hsieh, each of whom are independent within the meaning of applicable SEC reg- ulations and the listing standards of the NYSE. For addi- tional information about the members of the Audit Com- mittee, see “Governance of the Company—What are the Committees of the Board?” What document governs the activities of the Audit Committee? The Audit Committee operates under a written charter adopted by the Board of Directors. The Audit Commit- tee’s responsibilities are set forth in the charter. The Audit Committee annually reviews and reassesses the adequacy of its charter and recommends any proposed changes to the Board for approval. The charter is available on our website at ir.yumchina.com. What are the responsibilities of the Audit Committee? t n e m e t a t S y x o r P The Audit Committee assists the Board in fulfilling its responsibilities for general oversight of the integrity of the Company’s financial statements, the adequacy of the Company’s system of internal controls and procedures and disclosure controls and procedures, the Company’s risk management, the Company’s compliance with legal and regulatory requirements, the independent auditor’s qualifications and independence and the performance of the Company’s internal audit function and independent auditor. The Audit Committee has the authority to obtain advice and assistance from independent legal, accounting or other advisors as the Audit Committee deems neces- sary or appropriate to carry out its duties and receive appropriate funding, as determined by the Audit Com- mittee, from the Company for such advice and assistance. The Audit Committee has sole authority to appoint, deter- mine funding for or replace the independent auditor and manages the Company’s relationship with its independent auditor, which reports directly to the Audit Committee. Each year, the Audit Committee evaluates the perfor- 72 YUM CHINA – 2020 Proxy Statement mance, qualifications and independence of the indepen- dent auditor. In doing so, the Audit Committee considers whether the independent auditor’s quality controls are adequate and the provision of permitted non-audit ser- vices is compatible with maintaining the auditor’s inde- the opinions of pendence, management and internal auditor. taking into account The members of the Audit Committee meet periodically in separate executive sessions with management (includ- ing the Company’s Chief Financial Officer and Principal Accounting Officer), the internal auditors and the inde- pendent auditor, and have such other direct and indepen- dent interaction with such persons from time to time as the members of the Audit Committee deem appropriate. The Audit Committee may request any officer or employee of the Company or the Company’s outside counsel or inde- pendent auditor to attend a meeting of the Audit Commit- tee or to meet with any members of, or consultants to, the Audit Committee. AUDIT COMMITTEE REPORT What matters have members of the Audit Committee discussed with management and the independent auditor? As part of its oversight of the Company’s financial state- ments, the Audit Committee reviews and discusses with both management and the Company’s independent audi- tor all annual and quarterly financial statements prior to their issuance. During 2019, management advised the Audit Committee that each set of financial statements reviewed had been prepared in accordance with account- ing principles generally accepted in the U.S. and reviewed significant accounting and disclosure issues with the Audit Committee. These reviews included discussions with the independent auditor of matters required to be dis- cussed pursuant the PCAOB and the SEC, including the quality (not merely the acceptability) of the Company’s accounting princi- ples, the reasonableness of significant judgments, the clarity of disclosures in the financial statements, disclo- sures related to critical accounting practices, and critical audit matters during the course of the audit. The Audit Committee has also discussed with KPMG matters relat- ing to its independence, including a review of audit and non-audit fees and the written disclosures and letter received from KPMG required by applicable require- to applicable requirements of ments of the PCAOB regarding KPMG’s communica- tions with the Audit Committee concerning indepen- dence. The Audit Committee also considered whether non-audit services provided by the independent auditor are compatible with the independent auditor’s indepen- dence. The Audit Committee also received regular updates, and written summaries as required by the PCAOB rules (for tax and other services), on the amount of fees and scope of audit, audit-related, tax and other ser- vices provided. In addition, the Audit Committee reviewed key initiatives and programs aimed at strengthening the effectiveness of the Company’s internal and disclosure control structure. As part of this process, the Audit Committee monitored the scope and adequacy of the Company’s internal audit- ing program, reviewing staffing levels and steps taken to implement recommended improvements in internal pro- cedures and controls. The Audit Committee also reviewed and discussed legal and compliance matters with man- agement, and, as necessary or advisable, the Company’s independent auditor. P r o x y S t a t e m e n t Has the Audit Committee made a recommendation regarding the audited financial statements for fiscal 2019? Based on the Audit Committee’s discussions with man- agement and the independent auditor and the Audit Com- mittee’s review of the representations of management and the report of the independent auditor to the Board of Directors, and subject to the limitations on the Audit Committee’s role and responsibilities referred to above and in the Audit Committee Charter, the Audit Commit- tee recommended to the Board of Directors that it include the audited consolidated financial statements in the Com- pany’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 for filing with the SEC. YUM CHINA – 2020 Proxy Statement 73 AUDIT COMMITTEE REPORT Who prepared this report? This report has been furnished by the members of the Audit Committee: Christian L. Campbell, Chair Peter A. Bassi Ed Yiu-Cheong Chan Cyril Han Louis T. Hsieh t n e m e t a t S y x o r P 74 YUM CHINA – 2020 Proxy Statement ADDITIONAL INFORMATION Who pays the expenses incurred in connection with the solicitation of proxies? Expenses in connection with the solicitation of proxies will be paid by us. Proxies are being solicited principally by mail, by telephone and through the Internet. We have retained Georgeson Inc. to act as a proxy solicitor for a fee estimated to be $9,500, plus reimbursement of out-of-pocket expenses. In addition, our directors, officers and regular employees, without additional compensation, may solicit proxies personally, by e-mail, telephone, fax or special letter. We will reimburse brokerage firms and others for their expenses in forwarding proxy materials to the beneficial owners of shares of Company common stock. How may I elect to receive stockholder materials electronically and discontinue my receipt of paper copies? Stockholders with shares registered directly in their name who received stockholder materials in the mail may elect to receive future annual reports and proxy statements from us and to vote their shares through the Internet instead of receiving copies through the mail. We are offering this service to provide stockholders with added convenience, to reduce our environmental impact and to reduce annual report printing and mailing costs. To elect this option, go to www.amstock.com, click on Stockholder Account Access, log in and locate the option to receive Company mailings via e-mail. Stockholders who elect this option will be notified by mail how to access the proxy materials and how to vote their shares on the Internet or by phone. If you consent to receive future proxy materials electroni- cally, your consent will remain in effect unless it is with- drawn by writing our transfer agent, American Stock Transfer and Trust Company, LLC, 6201 15th Avenue, Brooklyn, NY 11219 or by logging onto our transfer agent’s website at www.amstock.com and following the applicable instructions. Also, while this consent is in effect, if you decide you would like to receive a paper copy of the proxy materials, you may call, write or e-mail American Stock Transfer and Trust Company, LLC or Yum China Holdings, Inc., 7100 Corporate Drive, Plano, Texas 75024, or Yum China Holdings, Inc., Yum China Building, 20 Tian Yao Qiao Road, Shanghai 200030, People’s Republic of China, Attention: Corporate Secre- tary. I share an address with another stockholder, and we received only one paper copy of the proxy materials. How may I obtain an additional copy of the proxy materials? P r o x y S t a t e m e n t adopted a procedure The Company has called “householding,” which has been approved by the SEC. The Company and some brokers household proxy mate- rials, delivering a single Notice and, if applicable, this proxy statement and the annual report, to multiple stock- holders sharing an address unless contrary instructions have been received from the affected stockholders or they participate in electronic delivery of proxy materials. YUM CHINA – 2020 Proxy Statement 75 ADDITIONAL INFORMATION Stockholders who participate in householding will con- tinue to access and receive separate proxy cards. This pro- cess will help reduce our printing and postage fees, as well as save natural resources. If at any time you no longer wish to participate in householding and would prefer to receive a separate proxy statement, or if you are receiving multiple copies of the proxy statement and wish to receive only one, please notify your broker if your shares are held in a brokerage account or us if you hold registered shares. You can notify us by sending a written request to Yum China Holdings, Inc., 7100 Corporate Drive, Plano, Texas 75024, or to Yum China Holdings, Inc., Yum China Building, 20 Tian Yao Qiao Road, Shanghai 200030 Peo- ple’s Republic of China, Attention: Investor Relations. May I propose actions for consideration at next year’s annual meeting of the Company’s stockholders or nominate individuals to serve as directors? t n e m e t a t S y x o r P Under the rules of the SEC, if a stockholder wants us to include a proposal in our proxy statement and proxy card for presentation at the 2021 annual meeting of the Com- pany’s stockholders, the proposal must be received by our Corporate Secretary at our principal executive offices, Yum China Holdings, Inc., 7100 Corporate Drive, Plano, Texas 75024, or Yum China Holdings, Inc., Yum China Building, 20 Tian Yao Qiao Road, Shanghai 200030, People’s Republic of China, by November 27, 2020. We strongly encourage any stockholder interested in submit- ting a proposal to contact our Chief Legal Officer in advance of this deadline to discuss the proposal. Stock- holders may want to consult knowledgeable counsel with regard to the detailed requirements of applicable securities laws. Submitting a proposal does not guarantee that we will include it in our proxy statement. In addition, our amended and restated bylaws include provisions permitting, subject to certain terms and condi- tions, stockholders owning at least 3% of the outstanding shares of Company common stock for at least three con- secutive years to use our annual meeting proxy statement to nominate a number of director candidates not to exceed 20% of the number of directors in office, subject to reduc- tion in certain circumstances (“Proxy Access”). Pursuant to our Proxy Access bylaw, stockholder nomination of directors to be included in our proxy statement and proxy card for the 2021 annual meeting of the Company’s stockholders must be received by our Corporate Secretary no earlier than October 28, 2020 and no later than November 27, 2020. Stockholders must also satisfy the other requirements specified in our amended and restated bylaws. You may contact the Company’s Corporate Sec- retary at the addresses mentioned above for a copy of the relevant bylaw provisions regarding the requirements for nominating director candidates pursuant to Proxy Access. Under our amended and restated bylaws, stockholders may also nominate persons for election as directors at an annual meeting or introduce an item of business that is not included in our proxy statement. These procedures pro- vide that nominations for director nominees and/or an item of business to be introduced at an annual meeting must be submitted in writing to our Corporate Secretary at our principal executive offices, and the stockholder sub- mitting any such nomination or item of business must include information set forth in our amended and restated bylaws. For the 2021 annual meeting of the Company’s stockholders, we must receive the notice of your intention to introduce a nomination or to propose an item of busi- ness no earlier than January 8, 2021 and no later than February 7, 2021, unless we hold the 2021 annual meet- ing before April 8, 2021 or after June 7, 2021, in which case notice must be received no later than 10 days after notice of the date of the annual meeting is mailed or public disclosure of the date of the annual meeting is made, whichever first occurs. Stockholders must also satisfy the other requirements specified in our amended and restated bylaws. You may contact the Company’s Corporate Sec- retary at the addresses mentioned above for a copy of the relevant bylaw provisions regarding the requirements for making stockholder proposals and nominating director candidates. 76 YUM CHINA – 2020 Proxy Statement ADDITIONAL INFORMATION Is any other business expected to be conducted at the Annual Meeting? The Board is not aware of any matters that are expected to come before the Annual Meeting other than those referred to in this proxy statement. If any other matter should come before the Annual Meeting, the individuals named on the form of proxy intend to vote the proxies in accordance with their best judgment. The chairman of the Annual Meeting may refuse to allow the transaction of any business, or to acknowledge the nomination of any person, not made in compliance with the foregoing procedures. P r o x y S t a t e m e n t YUM CHINA – 2020 Proxy Statement 77 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K Í ‘ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2019 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR 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 (State or Other Jurisdiction of Incorporation or Organization) 7100 Corporate Drive Plano, Texas 75024 United States Of America 81-2421743 (I.R.S. Employer Identification No.) 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 Common Stock, Par Value $0.01 Per Share Trading Symbol(s) YUMC Name of Each Exchange on Which Registered New York Stock Exchange 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 pre- ceding 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. F o r m 1 0 - K Large accelerated filer: Í Non-accelerated filer: ‘ 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 stan- dards provided pursuant to Section 13(a) of the Exchange Act. ‘ 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 28, 2019, the last business day of the regis- trant’s most recently completed second fiscal quarter, was approximately $17.4 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 21, 2020 was 375,786,390 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for the registrant’s 2020 annual meeting of stockholders (the “2020 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 PART I ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information about our Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART II ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Pur- chases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . ITEM 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 14 17 51 51 51 51 52 54 57 80 81 ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclo- sure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 ITEM 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 ITEM 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 Stock- holder 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 SIGNATURES 136 K - 0 1 m r o F Forward-Looking Statements This annual report on Form 10-K (this “Form 10-K”) includes “forward-looking statements” within the meaning of Sec- tion 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 Pri- vate 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 plans to enhance digital and delivery capabilities, new store development plans, growth and margin expansion opportu- nities, franchise development, logistics and supply chain management, investment in technology and new business development. Forward-looking statements are neither predictions nor guarantees of future events, circumstances or per- formance 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 cir- cumstances, except as required by law. F o r m 1 0 - K YUM CHINA – 2019 Form 10-K 1 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”). General The KFC, Pizza Hut, Little Sheep, COFFii & JOY, East Dawning and Taco Bell brands are collectively referred to as the “brands” or “concepts”. Throughout this Form 10-K, the terms “brands” and “concepts” are used inter- changeably and “restaurants,” “stores” and “units” are used interchangeably. We are the largest restaurant company in China in terms of system sales, with $8.8 billion of revenues and 9,200 restaurants as of year-end 2019. Our growing restaurant base consists of our flagship KFC and Pizza Hut brands, as well as emerging brands such as Little Sheep, COF- Fii & JOY, East Dawning and Taco Bell. We have the exclusive right to operate and sublicense the KFC, Pizza Hut and, subject to achieving certain agreed-upon mile- stones, Taco Bell brands in China (excluding Hong Kong, Taiwan and Macau), and own the intellectual property of the Little Sheep, COFFii & JOY and East Dawning con- cepts outright. We were the first major global restaurant brand to enter China in 1987 and, with over 30 years of operations, we have developed deep operating experience K - 0 1 m r o F in the China market. Opening restaurants at an average of more than two new locations per day over the past five years, we have since grown to become one of China’s largest restaurant developers with locations in over 1,300 cities as of December 31, 2019. We believe that there is significant opportunity 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, 2019, we owned and operated approximately 90% of our restaurants. Franchisees con- tribute to our revenues on an ongoing basis through the payment of royalties based on a percentage of sales. Restaurant Concepts The following is a brief description of each concept: KFC KFC is the leading and the largest quick-service restaurant (“QSR”) brand in China in terms of 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, 2019, there were over 6,500 KFC restaurants in over 1,300 cities 2 YUM CHINA – 2019 Form 10-K across China, and KFC continues to grow in both large and small cities. In addition to Original Recipe chicken, KFC in China has an extensive menu featuring pork, sea- food, rice dishes, fresh vegetables, soups, congee, desserts and many other products, including premium coffee. The KFC brand is also seeking to increase revenues from its restaurants throughout the day with breakfast, delivery and 24-hour operations in many of its locations. KFC pri- marily competes with Western QSR brands in China, such as McDonald’s, Dicos and Burger King, among which we believe KFC has an approximate two-to-one lead over its nearest competitor in terms of store count as of the end of 2019. Pizza Hut Pizza Hut is the leading and the largest casual dining res- taurant (“CDR”) brand in China in terms of system sales and number of restaurants, operating in over 500 cities as of December 31, 2019 and offering multiple dayparts, including breakfast, lunch and afternoon tea. Since open- ing its first China location in Beijing in 1990, Pizza Hut has grown rapidly and, as of year-end 2019, there were over 2,200 Pizza Hut restaurants across China. Pizza Hut has an extensive menu offering a broad variety of pizzas, entrees, pasta, rice dishes, appetizers, beverages and des- serts. Measured by number of restaurants, we believe Pizza Hut has an approximate five-to-one lead over its nearest CDR competitor in China as of the end of 2019. Other Concepts Little Sheep. Little Sheep is a casual dining brand with roots in Inner Mongolia, China, that specializes in “Hot Our Strategies The Company’s primary strategy is to grow sales and profits across its portfolio of brands through organic growth, growth of franchise units and development of new restaurant concepts. Other areas of investment include store remodels, product innovation and quality, improved operating platforms leading to improved ser- vice, store-level human resources including recruiting and training, creative marketing programs and product testing. New-Unit Growth Development pipeline. We expanded our restaurant count from 6,715 units as of year-end 2014 to 9,200 units as of year-end 2019, representing a compounded annual growth rate (“CAGR”) of 6%. The Company opened 1,006 new stores in 2019, mainly driven by development of the KFC brand. Our new KFC and Pizza Hut units have an average pre-tax cash payback of approximately two years and three to four years, respectively, before consid- Pot” cooking, which is very popular in China, particularly during the winter months. Little Sheep had 310 units in both China and international markets as of December 31, 2019. Of these, approximately 290 units were franchised. COFFii & JOY. COFFii & JOY is a coffee concept developed by the Company in 2018, featuring specialty coffee. As of December 31, 2019, there were 53 COF- Fii & JOY units in China. East Dawning. East Dawning is a Chinese food QSR brand located predominantly in bustling transportation hubs. There were 15 East Dawning units as of December 31, 2019. Taco Bell. Taco Bell is the world’s leading QSR brand specializing in Mexican-style food, including tacos, bur- ritos, quesadillas, salads, nachos and similar items. The Company opened its first Taco Bell restaurant in Shanghai, China, in December 2016. As of December 31, 2019, there were seven Taco Bell units in China. F o r m 1 0 - K ering G&A expenses. We are confident in the long-term market opportunities in China and we believe we have the potential to grow to 20,000 restaurants or more in the future. Our expansion strategy has been systematically focused on high potential locations across city tiers, including entering new cities and trade areas. We are also keen on exploring various new store formats to support further store expansion, including different store designs or service models aimed at addressing the needs of differ- ent customers and occasions. We believe that our first- mover advantage and in-depth local knowhow will help us to build robust development pipelines to seize the mar- ket opportunities. For additional information on the risks associated with this growth strategy, see the section enti- tled “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.” YUM CHINA – 2019 Form 10-K 3 PART I Franchise opportunity. As of December 31, 2019, approximately 10% of our restaurants were operated by franchisees. We anticipate high franchisee demand for our brands, supported by strong unit economics, operational consistency and simplicity, and multiple store formats to drive restaurant growth. While the franchise market in China is still in its early stages compared to developed markets, the Company plans to continue to develop its franchisee-owned store portfolio over time. Same-Store Sales Growth Food innovation. We are keenly aware of the strength of our core menu items, but we also seek to continue to introduce innovative items to meet evolving consumer preferences and local tastes, while simultaneously main- taining brand relevance and broadening brand appeal. Each of our concepts has proprietary menu items, and emphasizes the preparation of food with high quality ingredients, as well as unique recipes and special season- ings to provide appealing, tasty and convenient food choices at competitive prices. In 2019, KFC launched an “Unlimited” premium burger line, including a Chicken and Shrimp Burger and an Australian Beef Burger. As part of KFC’s “Limited Time Offerings,” we also launched Shrimp Burger, Double Flavor Spicy Chicken, Portobello Mushroom Burger and Double Down Burger. Additionally, KFC added a Wing Tip Bucket, Duck Wraps and an upgraded Stuffed Crois- sant and Beef Congee to its breakfast line, and also launched a variety of tea drinks (such as Yogurt topped oolong tea). For Pizza Hut, we also launched new prod- ucts, such as Lava Musang-king Durian Pizza, Double Thin & Crispy Pizza, Dragon Fruit Drinks, Snow Pizza, local and Brewed Wine Desserts. Leveraging our know-how and the wealth of consumer taste preference data we have accumulated through our many years of operations, we have become a pioneer in food innovation, pushing the boundaries of Western QSR and CDR dining in China. Thursdays to all customers. In addition, Pizza Hut contin- ued its multiple value campaigns, such as “Two dishes for 99 RMB” (mainly pizza and steak menu items) and “Scream Wednesday” for loyalty program members. “Scream Wednesday” also offers core products at attrac- tive prices, including pizzas, steak and dessert options, and has received positive consumer feedback. Pizza Hut also introduced various innovative products, especially in the pizza category, and piloted drinks and appetizers for “Scream Wednesday.” Daypart opportunities. We believe there are significant daypart opportunities across our brands. For example, KFC expanded its K-coffee offerings in the breakfast and afternoon dayparts, while Pizza Hut continued its focus on breakfast and business lunch to further grow same-store sales. Digitalization. Our vision is to become “the world’s most innovative pioneer in the restaurant industry”. We believe we are a first-mover among China’s restaurant brands in utilizing and investing in digital technologies to modern- ize our business operations and accelerate our growth, which is critical to empower and maintain our competitive advantage in China. In recent years, we have invested, and plan to step up investments, in digitalization, embarking on end-to-end digitalization of our business operations. • 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. Digital orders accounted for 61% of Company sales in the fourth quarter of 2019. Value innovation. KFC plans to continue focusing on value with product offerings such as the bucket and increased combo meal options throughout the day. In 2019, KFC continued its “Crazy Thursday” campaign, which offers core products at attractive prices on • Payment. We accept payments through third-party mobile payment processors, such as WeChat Pay, Ali- pay 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 4 YUM CHINA – 2019 Form 10-K K - 0 1 m r o F option for users within a single APP. In addition, through collaboration with Alipay, we have introduced “Smile to Pay” in around 1,000 KFC restaurants across China as of December 31, 2019, which uses facial rec- ognition technology to enable our guests to make pay- ments for their orders at digital kiosks without having to reach for their wallets. Approximately 91% of pay- ments were made through digital form in 2019, which primarily includes mobile applications and aggregators’ platforms. • Artificial intelligence. KFC introduced artificial intelli- gence (“AI”) technologies to personalize menus for diners in January 2019. Such technology analyzes guests’ ordering patterns and local tastes to enable KFC’s APP to recommend personalized menu items which guests are most likely to be interested in. The APP then offers additional personalized and discounted trade-up options. In addition, we also have adopted AI technology to analyze and forecast transaction volume so that we can improve labor scheduling and inventory management. Guest loyalty and interaction. KFC and Pizza Hut each operates a loyalty program that allows registered mem- bers to earn points for each qualifying purchase, which may be redeemed for future purchases of KFC or Pizza Hut branded products or other products for free or at a dis- counted price. Starting from May 2018, KFC and Pizza Hut’s K-Gold programs have been merged into one single program, “V-Gold program”, which was further upgraded in-house to include the loyalty programs for Taco Bell and Little Sheep. We believe that one single loyalty program for multiple brands can create cross- selling opportunities. In order to further enhance our guest loyalty, in July 2018, KFC launched a privilege member- ship subscription program which offers privilege mem- bers benefits, such as free delivery and discounts on coffee or breakfast items, over the membership period. Results indicate that the program has been effective in increasing repeat order frequency and guest loyalty. Pizza Hut also launched a family privilege membership pro- gram in the fourth quarter of 2018. Because of broad appeal and strong brand awareness, our loyalty program membership increased rapidly. As of December 31, 2019, our loyalty programs had over 215 million members and over 70 million members for KFC and Pizza Hut, respec- tively. Such a large number of loyalty program members in turn provides a substantial amount of valuable cus- tomer behavioral data, forming the basis of accurate arti- ficial intelligence analysis. 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. In early 2016, the KFC Super APP, KFC’s proprie- tary self-developed smartphone application, was imple- mented nationwide. Pizza Hut launched the Pizza Hut Super APP, its proprietary smartphone application, in 2017. As of December 31, 2019, KFC Super APP and Pizza Hut Super APP have enjoyed an aggregate of 86 million downloads. In December 2018, we developed and launched the KFC “Pocket Store” in the KFC Super APP. This mobile game invites customers to personalize and cultivate their own virtual KFC stores. Gamified fea- tures such as the ability to unlock new products and design the customers’ storefront further augment guest experi- ence, enhance guest interaction and ultimately lead to increased sales for us. Delivery. China is a world leader in the emerging O2O market. This is where digital online ordering technologies interact with traditional brick and mortar retail to enhance the shopping experience. We see considerable growth potential in the in-home consumption market by aligning our proven restaurant operation capabilities with emerg- ing specialized O2O firms, or aggregators, as well as with our own APPs, which offer consumers the ability to order restaurant food at home. These aggregators include our restaurants in their mobile or online platforms and we generate revenue when orders placed through their plat- forms are delivered to the customers. We pay a commis- sion typically based on a percentage of sales that are processed through the platform. Pizza Hut and KFC started partnering with aggregators in 2015, and today most restaurants in the KFC, Pizza Hut, Taco Bell and COFFii & JOY concepts offer delivery service. In addition to ordering through aggregators’ platforms, customers 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 aggrega- tors, and manage costs and commissions in a more YUM CHINA – 2019 Form 10-K 5 F o r m 1 0 - K PART I competitive manner. We have also made investments in delivery outside our concepts, including via the acquisi- tion of a controlling interest in the holding company of DAOJIA.com.cn (“Daojia”), an established online food delivery service provider. In the past, we either used our own dedicated riders to deliver orders placed through aggregators’ platforms or paid an additional commission for the delivery services provided by aggregators. Starting in 2019, we used our own dedicated riders to deliver orders placed through aggregators’ platforms to customers of KFC and Pizza Hut stores, which we believe will give us greater control over delivery quality and improve our ability to make timely deliveries during peak hours. In 2019, approximately 19% of KFC Company sales and 26% of Pizza Hut Company sales were generated from delivery. We believe delivery continues to be a business opportunity with potential for further growth. Going for- ward, we will continue to improve our delivery efficiency by adopting artificial intelligence-enabled technology. Such technology will analyze big data of rider activities and deliver route information to optimize business cycles and improve scheduling efficiency of riders and other labors. K - 0 1 m r o F Best in-store experience. We have developed a variety of restaurant formats for KFC and Pizza Hut to meet differ- ent needs. We are also strategically adapting our restau- rant formats based on our expansion strategy for our restaurant network and delivery business. For example, we are opening more small-format restaurant units which will provide us the flexibility to further penetrate our mar- kets. We are also reshaping certain restaurants by provid- ing fewer seats and focusing more on delivery orders. The Company continuously looks for ways to improve the customer experience. We have accelerated restaurant upgrades and remodeling to implement the latest technol- ogy, equipment and infrastructure and improve the dining experience. For example, with continued investment in refurbishing our restaurants, over 80% of KFC’s store portfolio as of December 31, 2019 was remodeled or built in the past five years. Pizza Hut is also well-regarded for offering consumers a contemporary casual dining setting. In 2019, more than 20% of Pizza Hut units were remod- eled. Our brands also look to improve efficiency to drive sales growth. For example, we have simplified menus and fine-tuned our digital menu boards and in-store self- service order devices. Enhanced Profitability We focus on improving our unit-level economics and overall profits while also making the necessary invest- ments to support our future growth. For example, we use AI-based technology to implement store-based hourly sales forecasting, which supports labor scheduling and inventory management. Moreover, restaurant managers can use a “pocket manager”, and in some pilot stores, “smart watches” and “smart glasses”, to closely monitor the performance of the restaurants, which improves man- agement efficiency. We also develop innovative new food offerings to enhance our profitability. One example of our creativity is the new Wing Tip bucket – in 2019, we used alternative chicken parts to develop a tasty new product that also represents good value. We plan to pursue addi- tional opportunities to improve profits over the long term by continuing our focus on fiscal discipline and leverag- ing fixed costs, while maintaining the quality customer experience for which our brands are known. Franchise and New Business Development Franchise development. The Company’s franchise pro- grams are designed to promote consistency and quality, and the Company is selective in granting franchisees. Franchisees supply capital—initially by paying a fran- chise fee to the Company and by purchasing or leasing the land use right, building, equipment, signs, seating, inven- tories and supplies; and, over the longer term, by rein- vesting in the business through expansion. As of 6 YUM CHINA – 2019 Form 10-K December 31, 2019, franchisees owned and operated about 10% of our restaurants. Franchisees contribute to the Company’s revenues through the payment of upfront franchise fees and ongoing royalties based on a percent- age of sales and the payment for other transactions with the Company, such as purchases of food and paper prod- ucts, advertising services and other services. The Company believes that it is important to maintain strong and open relationships with its 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 tech- niques. As vehicle ownership continues to grow in China, the Company believes that gas stations and highway service areas can provide the Company with an opportunity to expand our operations and consumer base. In 2019, the Company entered into strategic agreements with China Petrochemical Corporation (“Sinopec”) and with China National Petroleum Corporation (“CNPC”) to collaborate on the development of franchise restaurants at gas stations operated by Sinopec and CNPC across China. Sinopec and CNPC collectively operate over 50,000 gas stations in China. As of December 31, 2019, there were five fran- chise restaurants in gas stations operated by Sinopec or CNPC in China. New business development. Our growth strategy includes increasing our presence in the Chinese cuisine and coffee Unconsolidated Affiliates segments. For example, we acquired the well-known Chinese restaurant concept Little Sheep. In recent years, we have also been actively developing our new restaurant concepts, East Dawning and COFFii & JOY. In August 2019, the Company entered into a definitive agreement to acquire a controlling interest in the Huang Ji Huang group, a leading Chinese-style casual dining franchise business. The transaction is expected to close in the first half of 2020, subject to the satisfaction of closing condi- tions. Founded in 2004 and headquartered in Beijing, Huang Ji Huang has over 640 restaurants in China and internationally as of December 31, 2019. The group oper- ates primarily under a franchise model and its brand port- folio consists of “Huang Ji Huang,” an industry-leading simmer pot brand, as well as “San Fen Bao,” a newly launched Chinese fast food concept in China. With the planned addition of Huang Ji Huang, the Company aims to gain a stronger foothold and enhanced know-how in the Chinese dining space, which represents a significant share of the dining market in China. In addition, with the Com- pany’s scale and system capabilities, and Huang Ji Huang’s track record of product R&D and brand man- agement, the acquisition is expected to create synergies for both companies’ restaurant concepts. As of year-end 2019, approximately 10% of our system wide restaurants were operated by unconsolidated affili- ates. All of these restaurants were KFC restaurants, or approximately 14% of total KFC restaurants as of year-end 2019. These unconsolidated affiliates are Chinese joint venture entities partially owned by the Company, which helped KFC establish its initial presence in certain regions of China. F o r m 1 0 - K Restaurant Operations Restaurant management structure varies among our brands and by unit size. Generally, each restaurant oper- ated by the Company is led by a Restaurant General Man- ager (“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 Area Managers. In addition, senior operations leaders regularly visit restaurants to promote adherence to system standards and mentor restaurant teams. Each brand issues detailed manuals, which may then be customized to meet local regulations and customs. These manuals set forth stan- dards and requirements for all aspects of restaurant opera- tions, including food safety and quality, food handling and product preparation procedures, equipment mainte- nance, facility standards and accounting control proce- dures. The restaurant management teams are responsible for the day-to-day operation of each unit and for ensuring compliance with operating standards. YUM CHINA – 2019 Form 10-K 7 PART I Supply and Distribution 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 chicken, cheese, beef and pork products and paper and packaging materi- als. 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. When prices increase, the brands may attempt to pass on such increases to their cus- tomers, although there is no assurance that this can be done practically. The Company partners with over 800 independent sup- pliers, which are mostly China-based. 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 man- agement system. Our in-house and integrated supply chain management system employs close to 1,600 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 dis- semination as well as fast store expansions. The Com- pany, along with multiple independently owned and operated distributors, utilizes 24 logistics centers and five consolidation centers to distribute supplies to Company- owned and franchised stores, as well as to third-party cus- tomers. 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 Trademarks and Patents K - 0 1 m r o F event that supply from an individual supplier or logistics center becomes unfeasible. The Company also owns a seasoning facility in Inner Mongolia, which supplies products to the Little Sheep business, as well as to third- party customers. To improve efficiency and effectiveness of the procure- ment process, the Company has adopted a central pro- curement 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 main- tain quality control and achieves better prices and terms through volume purchases. Under the central procure- ment model, the materials purchased from various suppli- ers are generally sold on a cost-plus basis. 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 temper- ature 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 reno- vating existing restaurants. For further information on food safety issues, see “Item 1A. Risk Factors—Risks Related to Our Business and Industry—Food safety and food-borne illness concerns may have an adverse effect on our reputation and business”. The Company’s use of certain material trademarks and service marks is governed by a master license agreement between Yum! Restaurants Asia Pte. Ltd. (“YRAPL”), a wholly-owned indirect subsidiary of Yum China’s former parent company, Yum! Brands, Inc. (“YUM”), and Yum Restaurants Consulting (Shanghai) Company Limited, a subsidiary of Yum China wholly-owned indirect (“YCCL”). Pursuant to the master license agreement, the Company is 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 intel- lectual property rights for restaurant services in the PRC, excluding Hong Kong, Taiwan and Macau. The term of the license is 50 years with automatic renewals for addi- 8 YUM CHINA – 2019 Form 10-K The Company owns registered trademarks and service marks relating to the Little Sheep, COFFii & JOY and East Dawning brands and pays no license fee related to these concepts. Collectively, these licensed and owned marks have significant value and are important to the Company’s business. The Company’s policy is to pursue registration of our important intellectual property rights whenever feasible and to oppose vigorously any infringe- ment of our rights. tional consecutive renewal terms of 50 years each, subject only to YCCL being in “good standing” and unless YCCL gives notice of its 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 gener- ally not to compete with YUM. The Company’s use of certain other material intellectual property (including intellectual property in product rec- ipes, restaurant operation and restaurant design) is like- wise governed by the master license agreement with YRAPL. Working Capital Information about the Company’s working capital is included in MD&A in Part II, Item 7. and the Consolidated State- ments of Cash Flows in Part II, Item 8. Seasonality Due to the nature of our operations, the Company typically generates higher sales during Chinese festivities, holiday sea- sons as well as summer months, but relatively lower sales and lower operating profit during the second and fourth quar- ters. Competition Data from the National Bureau of Statistics of China indi- cates that sales in the consumer food service market in China totaled approximately $658 billion in 2019. Indus- try conditions vary by region, with local Chinese restau- rants and Western chains present, but the Company possesses 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, competi- tion in China is increasing and the Company still com- petes with respect to food taste, quality, value, service, convenience, restaurant location and concept. The restau- rant business is often affected by changes in consumer F o r m 1 0 - K tastes; national, regional or local economic conditions; demographic trends; traffic patterns; the type, number and location of competing restaurants; and disposable income. The Company competes not only for consumers but also for management and hourly personnel and suitable real estate 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. YUM CHINA – 2019 Form 10-K 9 PART I Research and Development In January 2019, we opened a world-class 27,000 square- foot innovation center in downtown Shanghai. The inno- vation 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. Its state of the art facilities include a test kitchen, a sensory test area, a coffee training studio, as well as a suite of labs covering restaurant equip- ment and technology innovation, packaging innovation, new store model prototyping, quality assurance, and con- tent production. From time to time, the Company also works with independent suppliers to conduct research and development activities for the benefit of the Company. Government Regulation The Company is subject to various laws affecting its busi- ness, including laws and regulations concerning informa- tion security, labor, health, sanitation and safety. Each of the concepts’ restaurants must comply with licensing and regulation by a number of governmental authorities, which include restaurant operation, health, sanitation, food safety, environmental protection and fire agencies in the province and/or municipality in which the restaurant is located. The Company has not historically been materi- ally adversely affected by such licensing and regulation or by any difficulty, delay or failure to obtain required licenses or approvals. 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. See “Item 1A. Risk Factors” for a discussion of risks relating to federal, state, provincial, local and international governmental regulation of our business. Regulations Relating to Dividend Distribution K - 0 1 m r o F 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 accor- dance with applicable accounting standards and regula- tions. 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 allo- cate 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. 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 cri- teria. Our China subsidiaries may deduct reasonable expenses that are actually incurred and are related to the generation of their income, including interest and other 10 YUM CHINA – 2019 Form 10-K 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 govern- ment or tax authorities. Yum China and each subsidiary of Yum China that is organized outside of China intends to conduct its man- agement 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 enter- prise for purposes of the EIT Law, and should not be sub- ject to Chinese enterprise income tax on that basis. See “Item 1A. Risk Factors—Risks Related to Doing Busi- ness 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 / Business 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. Pur- suant 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 ser- vices, less any creditable VAT already paid or borne by such entity upon purchase of materials and services. 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 company 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 cer- including, among tain conditions and requirements, others, that the Hong Kong resident enterprise directly owns at least 25% equity interests of the Chinese enter- prise and is a “beneficial owner” of the dividends. We believe that our Hong Kong subsidiary, which is the equity holder of our Chinese subsidiaries, 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 declared or earn- ings expected to be repatriated since 2018 are subject to the reduced withholding tax of 5%. However, if our Hong Kong subsidiary is not considered to be the “beneficial owner” of the dividends by the Chinese local tax author- ity, 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 F o r m 1 0 - K YUM CHINA – 2019 Form 10-K 11 PART I 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. 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 Prop- erty by Non-resident Enterprises (“Bulletin 7”). Pursuant to Bulletin 7, an “indirect transfer” of Chinese taxable assets, including equity interests in a China resident enter- prise (“Chinese interests”), by a non-resident enterprise, may be recharacterized 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 trans- ferred 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 pur- pose. 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 trans- feror fails to pay the taxes and the party obligated to with- hold 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 12 YUM CHINA – 2019 Form 10-K K - 0 1 m r o F 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 effec- tive January 1, 2019, impose general anti-avoidance tax rules (“GAAR”) on transactions conducted by individu- als. As a result, if the China tax authority invokes the GAAR and deems that indirect transfers made by indi- vidual stockholders lack reasonable commercial pur- poses, 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 (discussed under “—Our History” below) 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 excep- tion 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 in non-open market transac- tions may be taxable under the China indirect transfer rules and our China subsidiaries may have filing obliga- tions in respect of such transfers upon the request of rele- vant 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 author- ities. 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 repatria- tion 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 begin- ning after December 31, 2017 and (2) Yum China recorded additional income tax expense in the fourth quarter of 2017, including an estimated one-time transi- tion tax on its deemed repatriation of accumulated undis- tributed 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 Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not exceeding one year from the enactment date. The Tax Act requires complex computations with significant esti- mates to be performed, significant judgments to be made in interpretation of the provisions, and the preparation and analysis of information not previously relevant or regu- larly produced. The U.S. Treasury Department, the U.S. Internal Revenue Service (the “IRS”), SEC and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Act will be applied or other- wise administered that is different from our current inter- pretation. We completed our analysis of the Tax Act in the fourth quarter of 2018 according to guidance released by the U.S. Treasury Department and the IRS as of December 2018 and made an adjustment to the provi- sional amount of the transition tax accordingly. 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 transi- tion tax computation based on the final regulations released in the first quarter of 2019 and recorded addi- tional income tax expense for the transition tax accord- ingly. In December 2017, the U.S. Securities and Exchange Commission (the “SEC”) staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of See “Item 1A. Risk Factors” for a discussion of risks relating to federal, state, local and international regulation relating to taxation of our business. F o r m 1 0 - K Employees As of year-end 2019, the Company employed approximately 450,000 persons, approximately 91% of whom were res- taurant team members who were employed on a full- or part-time basis with their pay calculated based on their service hours. The Company believes that it provides working conditions and compensation that compare favorably with those of our principal competitors. The majority of our employees are paid on an hourly basis. The Company considers our employee relations to be good. 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 inde- pendent, 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 on November 1, 2016. YUM CHINA – 2019 Form 10-K 13 PART I Available Information The Company makes available through the Investor Rela- tions section of its internet website at ir.yumchina.com 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 prac- ticable 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 7100 Corporate Drive, Plano, Texas 75024 United States of America, Attention: Investor Relations. Information about our Executive Officers The executive officers of the Company as of February 21, 2020, and their ages and current positions as of that date, are as follows: Name Age Title Joey Wat Andy Yeung Johnson Huang Jeff Kuai Danny Tan Leila Zhang Joseph Chan Aiken Yuen Alice Wang Xueling Lu 48 47 57 39 50 51 51 60 50 46 Chief Executive Officer Chief Financial Officer General Manager, KFC General Manager, Pizza Hut Chief Supply Chain Officer Chief Technology Officer Chief Legal Officer Chief People Officer Chief Public Affairs Officer Controller and Principal Accounting Officer K - 0 1 m r o F Joey Wat has served as the Chief Executive Officer of Yum China since March 2018 and as a member of our board of directors since July 2017. Ms. Wat served as the President and Chief Operating Officer of Yum China from February 2017 to February 2018. She served as the Chief Executive Officer, KFC from October 2016 to February 2017, a position she held at the YUM China Division of YUM (“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 posi- tions at AS Watson of Hutchison 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 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 Strat- egy of Watson in Europe to Managing Director of Savers in 2007. Before joining Watson, Ms. Wat spent seven years in management consulting including with McKin- sey & Company’s Hong Kong office from 2000 to 2003. Andy Yeung has served as the Chief Financial Officer of Yum China since October 2019. Prior to joining Yum China, Mr. Yeung served as the Chief Financial Officer of Smart Finance International Limited, a financial technol- ogy company, from April 2017. Between January 2014 and March 2017, he served as the Chief Financial Officer of Cheetah Mobile Inc., a NYSE-listed mobile internet company, where he led their successful IPO and built the finance, internal control and investor relations functions. 14 YUM CHINA – 2019 Form 10-K From 2009 to 2013, Mr. Yeung worked at Oppenheimer & Co. Inc. as Director, Executive Director and then Managing Director, responsible for research coverage of China’s internet and media sectors. From 1995 to 2009, he worked at various companies in the U.S. in equity research, management consulting and credit risk management. Mr. Yeung has been a Chartered Financial Analyst charter holder since 2001. Johnson Huang has served as General Manager, KFC since February 2017. He served as the Chief Information and Marketing Support Officer of the Company from October 2016 to February 2017, a position he held at Yum! Restaurants China from December 2014 to October 2016. Mr. Huang joined YUM in 2006 to lead the infor- mation technology department in China. He held various leadership positions in Yum! Restaurants China, includ- ing Chief Information and Marketing Support Officer from September 2014 to February 2017, Chief Informa- tion Officer from January 2013 to September 2014, Vice President of Information Technology from September 2008 to January 2013, and Senior Director of Information Technology from October 2006 to August 2008. Mr. Huang has been the key architect of Yum! Restau- rants 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 Cap Gemini Ernst & Young Group in Taiwan and the greater China region and Evergreen Group in Taiwan and the U.K. 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 of the Com- pany from March 2017 to October 2017 and as the Brand General Manager, Pizza Hut Home Service from October 2016 to March 2017, a position he held at Yum! Restau- rants China from January 2015 to October 2016. From March 2012 to December 2014, Mr. Kuai was Director of Delivery Support Center of Yum! Restaurants China, where he was instrumental in building online ordering and e-commerce capabilities. Before that position, Mr. Kuai spent nine years in the information technology depart- ment of Yum! Restaurants China enhancing information technology infrastructure and productivity. Danny Tan has served as the Chief Supply Chain Officer of Yum China since January 2018. Mr. Tan previously served as the Chief Support Officer of Yum China from October 2016 to January 2018, a position he held at Yum! Restaurants China from January 2015 to October 2016. His responsibilities include overseeing quality assurance, food safety, procurement, engineering, logistics and sourcing planning and general management of Taco Bell. Mr. Tan joined YUM in 1997 in the finance department of Yum! Restaurants China and began leading the logistics department in 2002. He subsequently led supply chain management as Senior Director from March 2014 to December 2014. Prior to joining YUM, he was a Senior Analyst with Walt Disney, Hong Kong and a Senior Auditor with Deloitte & Touche, Singapore. Leila Zhang has served as the Chief Technology Officer of Yum China since March 2018. Ms. Zhang served as Vice President, Information Technology from October 2016 to March 2018, a position she held at Yum! Restau- rants China from 2014 to October 2016. Ms. Zhang joined Yum! Restaurants China 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 Elec- tronics (Shanghai) from 1992 to 1996. Joseph Chan has served as the Chief Legal Officer of Yum China since June 2019. Prior to joining Yum China, Mr. Chan was a partner with the U.S. based international law firm of Sidley Austin in Shanghai for almost a decade, 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 the U.S. based international law firm of Pillsbury Winthrop Shaw Pittman in San Francisco and Shanghai, initially as an associate and then a partner. He established the Shanghai office for Pillsbury in 2006, 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 recom- mended by Chambers Asia, IFLR and Legal 500 as a leading lawyer in Asia. F o r m 1 0 - K YUM CHINA – 2019 Form 10-K 15 PART I Aiken Yuen has served as the Chief People Officer of Yum China since March 2018. Mr. Yuen served as Vice Presi- dent, Human Resources of Yum China from October 2016 to February 2018, a position he held at Yum! Res- taurants China from March 2012 to October 2016. Mr. Yuen joined YUM in 2008 as the Talent Management and Development Director of Yum! Restaurants China. 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 posi- tion 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. Alice Wang has served as the Chief Public Affairs Officer of Yum China since March 2018. Ms. Wang previously served as the Senior Vice President, Public Affairs of Yum China from March 2017 to February 2018 and as Vice President, Public Affairs from October 2016 to March 2017, a position she held at Yum! Restaurants China since she joined YUM in March 2015. Prior to joining YUM, Ms. Wang spent 22 years with Heinz China, a food products company, where she served as Vice President of Corporate Affairs, Greater China from August 2011 to February 2015. Xueling Lu has served as Controller and Principal Accounting Officer of Yum China since January 2018. Ms. Lu previously served as Senior Director, Finance of Yum China, a position she held since she joined the Com- pany in November 2016. Prior to joining the Company, Ms. Lu was the Asia Pacific Controller of Lear Corpora- tion 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. K - 0 1 m r o F 16 YUM CHINA – 2019 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. The risk factors have been separated into four general groups: risks related to our business and industry, risks related to doing business in China, risks related to the separation and related transactions and risks related to our common stock. Based on the information currently known to us, we believe that the following information identifies the most significant 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 opera- tions. 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. Risks Related to Our Business and Industry Food safety and food-borne illness concerns may have an adverse effect on our reputation and business. Food-borne illnesses, such as E. coli, hepatitis A and sal- monella, have occurred and may re-occur within our sys- tem 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 restau- rants, including restaurants operated by us or our franchi- sees, to instances of food-borne illness or food safety issues could adversely affect our restaurants’ brands and reputations as well as our revenues and profits and possi- bly lead to product liability claims, litigation and dam- ages. If a customer of our restaurants becomes ill from food-borne 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 food-borne 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 suppli- ers 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 occur- rence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, which could result in disruptions in our sup- ply chain and/or lower margins for us and our franchisees. 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. Pursu- ant to the Regulation of Food Safety Law, certain viola- in severe tions of the food safety law may result administrative and criminal penalties imposed on the Company, as well as its legal representatives, senior man- agement members and other employees. There remain to the interpretation and uncertainties with respect enforcement of this newly amended Regulation of Food Safety Law. If penalties are imposed on our senior man- agement members, they may be prevented from perform- ing 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 Compa- ny’s reputation. F o r m 1 0 - K YUM CHINA – 2019 Form 10-K 17 PART I 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 franchi- sees’ quality assurance systems, which in turn depends on a number of factors, including the design of our quality control systems and employee implementation and com- pliance 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 assur- ance. There can be no assurance that our and our franchi- sees’ 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 finan- cial condition. Any significant liability claims, food contamination complaints reports of from our customers or 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 qual- ity 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 cer- tain of our and our franchisees’ employees may not adhere to our mandated quality procedures and require- ments. 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 res- taurants, which could lead to liability claims, complaints and related adverse publicity, reduced customer traffic at 18 YUM CHINA – 2019 Form 10-K K - 0 1 m r o F 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 percep- tion 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 han- dling 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 sup- pliers 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. Our business could be materially and adversely affected by the outbreak of a widespread health epidemic, such as coronavirus, 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 res- taurants 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 con- tracting 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 and adversely impact our ability to ensure supplies to the stores and to provide safety mea- sures to protect our employees and customers, which could materially and adversely affect our continuous operations. If an outbreak reaches pandemic levels, there may also be long-term effects on the economies of effected countries. Any of the foregoing within China would severely disrupt our operations and could have a material adverse effect on our business, results of opera- tions, cash flows and financial condition. For example, starting in January 2020, the novel corona- virus outbreak originating in Wuhan, China has signifi- cantly impacted the Company’s operations, including the temporary closure of more than 30% of its restaurants in China during the Chinese New Year holiday, and a sig- nificant decline in sales for restaurants that remained open, which is likely to have a materially adverse impact on the Company’s results of operations, cash flows and financial condition for the first quarter of 2020 and full year 2020. At this time, the Company cannot forecast when (and at what rate) the closed restaurants will re-open, which is subject to the local governments’ requirements, and when restaurant guest traffic will be restored (and at what level). The extent to which our oper- ations continue to be impacted by the outbreak will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and the actions by the government authorities to contain the outbreak or treat its impact, among other things. Insurance may be unavailable to cover any losses we incur as a result of the outbreak. Even if a virus or other illness does not spread signifi- cantly, the perceived risk of infection or health risk may affect our business. Our operations could also be dis- rupted if any of our employees or employees of our busi- ness partners were suspected of having a contagious illness or susceptible to becoming infected with a conta- gious 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 out- break 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. 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 reve- nues 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.” 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 comply with certain brand standards estab- lished by YUM in connection with the licensed business. If our failure to comply with YUM’s standards of opera- tions results in a material adverse effect on any of the brand businesses, YUM has various rights, including the right to terminate the applicable license or eliminate the exclusivity of our license in China. Additionally, the master license agreement requires that we pay a license fee to YUM of 3% of gross revenue from Company and franchise restaurant sales, net of certain taxes and surcharges, of all restaurants of the licensed brands in China. Prior to the separation, we did not con- sider such license fee in the evaluation of which Company assets should be tested for impairment. Whether Com- pany store-level assets are impaired will be determined by the overall business performance of the store at that time which will require an assessment of many operational factors. Nonetheless, it is possible that our impairment expense could increase going forward as a result of the inclusion of this license fee. While there may be other considerations that mitigate this expense, it is possible that the imposition of the license fee could impact our unit- level results, which could result in additional Company restaurant closures and/or lower new-unit development. F o r m 1 0 - K YUM CHINA – 2019 Form 10-K 19 PART I The master license agreement may be terminated upon the occurrence of certain events, such as the insolvency or bankruptcy of the Company. If the master license agree- ment were terminated, or any of our license rights were limited, our business, results of operations and financial condition would be materially adversely affected. Our success is tied to the success of YUM’s brand strength, marketing product innovation. campaigns and 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, Taiwan and Macau. 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, mar- keting 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 mate- rial adverse effect on our results of operations and our competitiveness in China. In addition, strategic decisions made by YUM management related to its brands, market- ing 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 out- side of China. We are also dependent upon third parties to make frequent deliveries of food products and other sup- plies 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 dis- ruptions could be caused by inclement weather, natural disasters such as floods, drought and hurricanes, increased demand, labor shortages, problems in production or dis- 20 YUM CHINA – 2019 Form 10-K K - 0 1 m r o F tribution, restrictions on imports or exports, government levies, political instability in the countries in which sup- pliers 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 dis- tributors and the countries in which they are located, food safety warnings or advisories or the prospect of such pro- nouncements 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 require- ments could lead to a disruption of service or supply until a new supplier or distributor is engaged, and any disrup- tion 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 procure- ment model allows us to maintain quality control and achieve better prices and terms through volume pur- chases. However, we may not be able to accurately esti- mate 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 (includ- ing 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 fluc- tuation 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 signifi- cantly 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. If we are unable to manage the cost of our raw materials or to increase the prices of our prod- ucts, it may have an adverse impact on our future profit margin. 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. The successful development of new units depends in large part on our ability to open new res- taurants 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 res- taurants 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 profit- able. The opening and success of new restaurants depends on various factors, including: • our ability to obtain or self-fund adequate development financing; • competition from other QSRs in current and future markets; • our degree of penetration in existing markets; • the identification and availability of suitable and eco- nomically 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. F o r m 1 0 - K As a significant number of our restaurants are operating on leased properties, we are exposed to the market condi- tions of the retail rental market. As of year-end 2019, we leased the land and/or building for over 7,300 restaurants in China. 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. YUM CHINA – 2019 Form 10-K 21 PART I 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 2020. 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 speci- fied 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. 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 per- centage 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 agree- ments. 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 agree- ment, we must negotiate the terms of renewal with the les- sor, 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 reve- nues 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 relo- cation may be less than the revenue and profit previously 22 YUM CHINA – 2019 Form 10-K K - 0 1 m r o F 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 suit- able 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 loca- tions 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 imple- ment 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 wide- spread 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 mem- bers, which could result in higher labor costs. In addition, our delivery business requires a large number of riders. Any shortage of riders could result in higher rider costs. The Chinese Labor Contract Law that became effective on January 1, 2008 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 cus- tomers, in which case our business and results of opera- tions would be materially and adversely affected. 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 abil- ity 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 con- siderable 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 per- ceived 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 plat- forms, mobile payment and ordering systems, loyalty programs and various other online processes and func- tions, are critical to our business and operations. For example, as of year-end 2019, loyalty program members increased to over 215 million members for KFC and over 70 million for Pizza Hut. KFC member sales represented approximately 57% of KFC’s system sales and Pizza Hut member sales represented approximately 51% of Pizza Hut’s system sales in the fourth quarter of 2019. As we continue to expand our digital initiatives, the risks relating to security breaches and cyber-attacks against our sys- tems, both internal and those we have outsourced, may increase. Because of our brand recognition in China, we are consis- tently subject to attempts to compromise our security and information systems, including denial of service attacks, viruses, malicious software or ransomware, and exploita- tions 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 mea- sures and may give rise to a cyber incident. The tech- niques 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 pre- vent 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 inter- ruption, misappropriation of company information or pri- vate 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), YUM CHINA – 2019 Form 10-K 23 F o r m 1 0 - K PART I costs to deploy additional personnel and network protec- tion technologies, train employees and engage third-party experts and consultants, as well as litigation costs result- ing from the incident. These costs, which could be mate- rial, could adversely impact our results of operations in the period in which they are incurred and may not meaning- fully limit the success of future attempts to breach our information technology systems. or access improper Unauthorized use, to, disclosure, theft or destruction of, our customer or employee personal, financial or other data or our proprietary or confidential is stored in our information systems or by third parties in substantial costs, on our behalf could result expose us to litigation and damage our reputation. information that K - 0 1 m r o F 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 ser- vice providers when, for example, receiving orders through mobile or online platforms, accepting digital pay- ments, operating loyalty programs and conducting digital marketing programs. Our information technology sys- tems, such as those we use for administrative functions, including human resources, payroll, accounting and inter- nal and external communications, can contain personal, financial or other information of our approximately 450,000 employees. We also maintain important proprie- tary and other confidential information related to our operations and identifiable information about our fran- chisees. 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, fran- chisees or service providers fail to comply with laws, reg- ulations and practice standards, and this information is obtained by unauthorized persons, used or disclosed inap- propriately or destroyed, it could subject us to litigation and government enforcement actions, cause us to incur 24 YUM CHINA – 2019 Form 10-K 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 condi- tion. 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 a new 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 circum- stances. Compliance with the cybersecurity law, as well as additional laws, 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 personal information of any breach, theft or loss of their personal 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 these areas will receive greater attention and focus from 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 informa- tion security and protection. If we are unable to manage these risks, we could become subject to penalties, includ- ing 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 informa- tion 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, scal- ability and capacity of our information technology sys- tems. 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 pre- venting 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 mal- feasance by our employees or third-party service pro- viders 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 sys- tems 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 investiga- tions 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 com- parable store sales, improve operations, implement cost controls and grow our business may be constrained. Our business depends on the performance of, and our long-term relationships with, third-party mobile payment infrastructure operators, internet service providers and delivery aggregators. processors, internet F o r m 1 0 - K Digital payments, including mobile payments, accounted for approximately 91% of Company sales in 2019. The ability to accept mobile payments is critical to our busi- ness. 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 or if these mobile payment processors are unwilling or unable to provide us with payment pro- cessing 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 YUM CHINA – 2019 Form 10-K 25 PART I telecommunications operators under administrative con- trol, and we obtain access to end-user networks operated by such telecommunications operators and internet ser- vice providers to give customers access to our websites. The satisfactory performance, availability and reliability of our websites, online platforms and apps depends on tel- ecommunications operators and other third-party pro- for communications and storage capacity, viders including bandwidth and server storage, among other things. If we are unable to enter into and renew agree- ments with these providers on acceptable terms, if any of our existing agreements with such providers are termi- nated 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 inter- fere 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, fail- ures or interruptions could materially impact our opera- tions and results of operations. K - 0 1 m r o F Additionally, we have no control over the costs of the ser- vices 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 aggre- 26 YUM CHINA – 2019 Form 10-K gators 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 2019, over 6,700 KFC and Pizza Hut res- taurants offer delivery services. Delivery contributed to 21% of Company sales for 2019. 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 aggre- gators 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. Our growth strategy with respect to COFFii & JOY may not be successful. As part of our strategy to tap into the growing China cof- fee market, we started to develop COFFii & JOY as our in 2018. As of standalone specialty coffee concept year-end 2019, we had opened 53 COFFii & JOY coffee stores in ten cities in eastern China using different store formats to test market demand and customer preferences. We plan to continue to scale the brand and open additional COFFii & JOY stores in the near future, which may require significant capital and management attention. The success of COFFii & JOY 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 COFFii & JOY. There is no assurance that our growth strategy with respect to COFFii & JOY will be successful or generate expected returns in the near term or at all. If we fail to exe- cute this growth strategy successfully, our business, results of operations and financial condition may be mate- rially and adversely affected. Our e-commerce business may expose us to new challenges and risks and may adversely affect our business, results of operations and financial condition. In 2017, we started to test a mobile e-commerce platform, V-Gold Mall, to allow consumers to search for products and place orders on our apps. We acquire a wide selection of products, including electronics, home and kitchen accessories, and other general merchandise, from suppli- ers and sell them directly to customers through our e-commerce platform. We expect to continue to add resources to the platform as we focus on expanding our product offerings and may also decide to make it available as a platform to third-party vendors to sell their products. Our e-commerce business exposes us to new challenges and risks associated with, for example, anticipating cus- tomer demand and preferences, managing inventory and handling more complex supply, product return and deliv- ery service issues. We are relatively new to this business 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, result- ing in inventory buildup and possible inventory write- downs and write-offs. We may also experience higher return rates on new 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 perfor- mance. In addition, we will have to invest in, and main- tain, the necessary network infrastructure and security to manage and process e-commerce volumes, and network failures may also result in complaints and expose us to liability. Furthermore, we rely on third-party delivery companies to deliver products sold on our e-commerce platform and interruptions to, or failures in, delivery ser- vices could prevent the timely or proper delivery of the products. Risks related to delivery services are described in further detail above under “—Our restaurants offer delivery services. Any failure to provide timely and reli- able delivery services by us may materially and adversely affect our business and reputation.” If we do not success- fully address new challenges specific to the e-commerce business and compete effectively, our business, results of operations and financial condition may be materially and adversely affected. The anticipated benefits of the acquisition of Daojia 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 acceler- ate growth by building know-how and expertise in the expanding delivery market. Achieving those anticipated benefits is subject to a number of uncertainties. In the fourth quarter of 2018, due to declining sales as a result of the intensified competition among delivery aggregators, we recorded an impairment charge of $12 million on intangible assets acquired from the Daojia business pri- marily attributable to the Daojia platform. In the fourth quarter of 2019, due to continuing declining sales and margin, we further wrote down Daojia reporting unit goodwill and intangible assets to zero, and recorded an additional impairment charge of $11 million. The operation of the Daojia business could 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 the acquisition of the Daojia business. 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, the Company also acquired a variable interest entity (“VIE”) and subsidiar- ies of the VIE in China effectively controlled by Daojia. YUM CHINA – 2019 Form 10-K 27 F o r m 1 0 - K PART I Chinese laws and regulations restrict and impose condi- tions 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 nec- essary licenses and permits in such industries that are cur- rently subject to foreign investment restrictions in China. Daojia operates these businesses in China through its con- solidated affiliated entities. Daojia has entered into a series of contractual arrangements with its consolidated affiliated entities and the nominee shareholders of its con- solidated affiliated entities. These contractual arrange- ments 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. K - 0 1 m r o F There are substantial uncertainties regarding the interpre- tation and application of current Chinese laws, rules and regulations. In addition, it is uncertain whether any new Chinese laws, rules or regulations relating to VIE struc- ture 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 discre- tion to take action in dealing with these violations, includ- ing 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 found by Chinese government authorities, courts or arbitral tribunals to be unenforce- able. The imposition of any of these measures could result 28 YUM CHINA – 2019 Form 10-K in a material adverse effect on Daojia’s business opera- tions and our business integration process. 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. 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 com- munications, 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, pros- pects, 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 inappropri- ate use of social media by our customers or employees could increase our costs, lead to litigation or result in neg- ative publicity that could damage our reputation and adversely affect our results of operations. We could be party to litigation that could adversely affect us by increasing our expenses, diverting to management significant monetary damages and other remedies. subjecting attention us or We are involved in legal proceedings from time to time. These proceedings do or could include consumer, employment, real estate-related, tort, intellectual property, breach of contract and other litigation. As a public com- pany, we may in the future also be involved in legal proceedings alleging violation of securities laws or deriv- ative litigation. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such law- suits may not be accurately estimated. Regardless of whether any claims against us are valid, or whether we are ultimately held liable, such litigation may be expensive to defend and may divert resources and management atten- tion away from our operations and negatively impact reported earnings. With respect to insured claims, a judg- ment for monetary damages in excess of any insurance coverage could adversely affect our financial condition or results of operations. Any adverse publicity resulting from these allegations may also adversely affect our repu- tation, which in turn could adversely affect our results of operations. In addition, the restaurant industry around the world has been subject to claims that relate to the nutritional content of food products, as well as claims that the menus and practices of restaurant chains have led to customer health issues, including weight gain and other adverse effects. We may also be subject to these types of claims in the future and, even if we are not, publicity about these mat- ters (particularly directed at the quick-service and fast- casual segments of the restaurant industry) may harm our reputation and adversely affect our business, results of operations and financial condition. 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 prohibit- ing 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 com- ply 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 the KFC, Pizza Hut and Taco Bell brands, as well as our rep- utation and prospects, business and results of operations. Publicity relating to any noncompliance or alleged non- compliance could also harm our reputation and adversely affect our business and results of operations. 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 taxes compared to companies operating primarily in the U.S. in relatively higher 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% and an additional 10% with- holding 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 subject to a U.S. corporate income tax rate of 21%. In addition, U.S. tax law provides anti-deferral and anti- base erosion provisions that may subject the U.S. parent company to additional U.S. taxes under certain circum- stances. If we are assessed with these taxes, it could cause our effective tax rate to increase and affect the amount of any distributions available to our stockholders. Tax matters, in tax rates, including changes 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 YUM CHINA – 2019 Form 10-K 29 F o r m 1 0 - K PART I income tax and other taxes in the U.S. and other jurisdic- tions. 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 foreign 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 liabil- ities, 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, the 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. 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 condi- tion. 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 sub- ject to uncertain interpretations. Since 2012, the Chinese government launched a VAT pilot reform to replace BT (“VAT pilot program”) to make reform to its retail tax structure by ending the co-existence of BT and VAT where BT would be gradually phased out and replaced by VAT. The retail tax structure reform is intended to be a progressive and positive shift to more closely align with a more modern service-based economy. Effective May 1, 2016, the retail tax structure reform has been rolled out to cover all business sectors nationwide where the BT has been completely replaced by VAT. The interpretation and application of the new VAT regime are not settled at some local governmental levels. In addition, the timetable for enacting the prevailing VAT regulations into national VAT law, including ultimate enacted VAT rates, 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 30 YUM CHINA – 2019 Form 10-K K - 0 1 m r o F increase our taxes and have an adverse effect on our results of operations and financial condition. results of operations may be adversely Our impacted by changes in consumer discretionary spending and general economic conditions. Purchases at our restaurants are discretionary for con- sumers and, therefore, our results of operations are sus- ceptible to economic slowdowns and recessions. Our results of operations are dependent upon discretionary spending by consumers, which may be affected by gen- eral economic conditions in China. Some of the factors that impact discretionary consumer spending include unemployment rates, fluctuations in the level of dispos- able income, the price of gasoline, stock market perfor- mance 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. The restaurant highly competitive. industry in which we operate is 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 and gen- eral 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 gro- cery, convenience, deli and restaurant services, including the offering by the grocery industry of convenient meals, including pizzas and entrees with side dishes. Competi- tion from delivery aggregators and other food delivery services in China has also increased in recent years, par- ticularly in urbanized areas. Increased competition could have an adverse effect on our sales, profitability or devel- opment plans, which could harm our results of operations and financial condition. 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. Any inability to successfully compete with the other res- taurants and catering services in our markets may prevent us from increasing or sustaining our revenues and profit- ability 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 ele- ments 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 modi- fications will not reduce our profitability. 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 intel- lectual 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 proprie- tary 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 jurisdic- tions with more robust intellectual property laws. 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, per- mits, registrations and filings in order to operate our res- taurant business. Each of our restaurants in China is required to obtain the relevant food business license, environmental protection assessment and inspection approval and fire safety design approval and fire preven- tion inspection report, and 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 rele- vant authorities and are valid only for a fixed period of time and subject to renewal and accreditation. There is no assurance that we or our franchisees will be able to obtain or maintain any of these licenses. 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, profit- ability and prospects. Furthermore, the application of laws governing intellectual property rights in China is uncer- tain 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 nega- tively affect our sales, profitability and prospects. F o r m 1 0 - K YUM CHINA – 2019 Form 10-K 31 PART I 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 liti- gation, 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 typi- cally generate higher sales during Chinese festivities, hol- iday 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 expe- rienced higher sales (such as the disruption in operations from the coronavirus outbreak during the Chinese New Year holiday in January 2020) would have a dispropor- tionately negative effect on our full-year results, and com- parisons 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. K - 0 1 m r o F 32 YUM CHINA – 2019 Form 10-K 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 mis- conduct 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 commit- ted 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. estimates Changes in accounting standards and subjective assumptions, by management related to complex accounting matters could significantly affect our results of operations and financial condition. judgments and Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including revenue recog- nition, long-lived asset impairment, impairment of good- will and other intangible assets, lease accounting and share-based compensation, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judg- ments could significantly change our reported or expected financial performance or financial condition. New accounting guidance may require systems and other changes that could increase our operating costs and/or change our financial statements. For example, imple- menting the new lease standard issued by Financial Accounting Standards Board requires us to make signifi- cant changes to our lease management system and other accounting systems, and results in changes to our finan- cial statements. The adoption of the new accounting stan- dard for leases may result in a higher amount of impairment loss on newly recognized right of use assets and negatively impact our results of operations. Our insurance policies may not provide adequate coverage for all claims associated with our business operations. We have obtained insurance policies that we believe are customary and appropriate for businesses of our size and type and at least in line with the standard commercial practice in China. However, there are types of losses we may incur that cannot be insured against or that we believe are not cost effective to insure, such as loss of reputation. If we were held liable for uninsured losses or amounts or claims for insured losses exceeding the limits of our insurance coverage, our business and results of operations may be materially and adversely affected. Unforeseeable adversely affect our business. business interruptions could Our operations are vulnerable to interruption by natural disasters, such as fires, floods and earthquakes, war, ter- rorism, power failures and power shortages, hardware and software failures, computer viruses and other events beyond our control. In particular, our business is depen- dent on prompt delivery and reliable transportation of our food products by our logistics partners. Unforeseeable events, such as adverse weather conditions, natural disas- ters, severe traffic accidents and delays, non-cooperation of our logistics partners, and labor strikes, could lead to delay or lost deliveries to our restaurants, which may result in the loss of revenue or in customer claims. There may also be instances where the conditions of fresh, chilled or frozen food products, being perishable goods, deteriorate due to delivery delays, malfunctioning of refrigeration facilities or poor handling during transpor- tation by our logistics partners. This may result in a failure by us to provide quality food and services to customers, thereby affecting our business and potentially damaging our reputation. Any such events experienced by us could disrupt our operations. In addition, insurance may not be available to cover losses due to business interruptions resulting from public health issues. Failure by us to maintain effective disclosure controls and procedures and internal control over financial reporting in accordance with the rules of the SEC could harm our business and results of operations and/or result investor confidence in our financial reports, which could have a material adverse effect on our business. in a loss of We are required to maintain effective disclosure controls and procedures and effective internal control over finan- cial reporting in connection with our filing of periodic reports with the SEC under the Exchange Act. We may fail to maintain effective disclosure controls and procedures and internal control over financial reporting, and our management and our independent registered pub- lic accounting firm may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. This may in turn cause inves- tors to lose confidence in our financial statements and negatively impact the trading price of our common stock. Furthermore, we have incurred substantial costs, and may need to incur additional costs and use additional manage- ment and other resources, to comply with these require- ments going forward. If we fail to remedy any material weakness, our financial statements may be inaccurate and we may face restricted access to the capital markets, which could adversely affect our business, results of operations and financial condition. 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. F o r m 1 0 - K 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 YUM CHINA – 2019 Form 10-K 33 PART I wide range of talent who can adapt to a dynamic, compet- itive and challenging business environment and are capa- ble 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 com- pensation, to attract and retain them. We also need to pro- vide 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. Our investment in technology and innovation may not generate the expected level of returns. We have invested and intend to continue to invest signifi- cantly 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 gener- ate sufficient returns or have the expected effects on our business operations, if at all. If our technology and inno- vation investments do not meet expectations for the above or other reasons, our prospects and share price may be materially and adversely affected. 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, poten- tially diverting management’s attention from the conduct of our business, and the expected synergies from the acquisition may not be realized. We may experience dif- ficulties in integrating our operations with the newly invested or acquired businesses, implementing our strat- egies or achieving expected levels of net revenues, profit- ability, productivity or other benefits. Therefore, we cannot assure you that our investments or acquisitions will benefit our business strategy, generate sufficient net reve- nues to offset the associated investment or acquisition costs, or otherwise result in the intended benefits. K - 0 1 m r o F 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 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 opera- tions 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 interna- tional companies with well-known Western brands. The Chinese economy, markets and levels of consumer spending are influenced by many factors beyond our con- trol, including current and future economic conditions, political uncertainty, unemployment rates, inflation, fluc- tuations in the level of disposable income, taxation, for- eign 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 con- trol and fiscal measures and allocation of resources. Although the Chinese government has implemented measures since the late 1970s emphasizing the utilization 34 YUM CHINA – 2019 Form 10-K of market forces for economic reform, the restructuring of state assets and state-owned enterprises, and the estab- lishment of improved corporate governance in business enterprises, a significant portion of productive assets in China is still owned or controlled by the Chinese govern- ment. The Chinese government also exercises significant control or influence over Chinese economic growth through allocating resources, controlling payment of for- eign currency-denominated obligations, setting monetary and fiscal policies, regulating financial services and insti- tutions 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 econ- omy. 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 nega- tive 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 eco- nomic 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. 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 stat- utes. 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 gov- ernment began to promulgate a comprehensive system of laws and regulations governing economic matters in gen- eral. 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 regu- lations 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 administra- tive 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 administra- tive and court proceedings, and the level of legal protec- tion 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 poli- cies 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. F o r m 1 0 - K YUM CHINA – 2019 Form 10-K 35 PART I Changes in trade relations between the United States and China, including the imposition of new or higher tariffs on goods imported from the United States, may have adverse impact on our business, results of operations and financial condition. We import certain products from the United States. In 2019, the United States and China imposed new or higher tariffs on goods imported from the other’s country. If the United States or China continues such tariffs, or if addi- tional 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. We are not able to predict future trade policy of the United States or of China or the terms of any renegoti- ated trade agreements, or their impact on our business. The adoption and expansion of trade restrictions and tariffs, quotas and embargoes, 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 condi- tion. In addition, changes in 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 results of operations and financial condition. Fluctuation in the value of RMB may result in foreign currency exchange losses. The conversion of the Chinese Renminbi (“RMB”) into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China (“PBOC”). RMB appreciated by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, the exchange rate between RMB and the U.S. dollar remained within a narrow range and, after June 2010, RMB appreciated slowly against the U.S. dollar again. On August 11, 2015, however, RMB depreciated by approximately 2% against the U.S. dollar, and exchange rate change of RMB against the U.S. dollar occurred relatively suddenly. In 2017, RMB appreciated by over 6% against the U.S. dollar, while, in 2018 and 2019, RMB fell approximately 6% and 1%, respectively, against the U.S. dollar. It is difficult to predict how market 36 YUM CHINA – 2019 Form 10-K K - 0 1 m r o F 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 denomi- nated in RMB. As a Delaware holding company, we may rely on dividends and other fees paid to us by our subsidi- aries 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 exam- ple, an appreciation of RMB against the U.S. dollar would make any new RMB-denominated investments or expen- ditures more costly to us, to the extent that we need to convert U.S. dollars into RMB for such purposes. Con- versely, 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 con- vert 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, fluctua- tions in exchange rates and restrictions on exchange may have a material adverse effect on your investment. Governmental control of currency conversion and payments of foreign currency and RMB out of mainland China may limit our ability to utilize our cash balances effectively and affect the value of your investment. The Chinese government imposes controls on the con- vertibility 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 struc- ture as a Delaware holding company, our income is pri- marily 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 com- plying 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 subsid- iaries 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 indebted- ness when due. 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 and regulations may have a significant impact on our business, results of operations and financial condition. applicable laws with Our business and operations are subject to the laws and regulations of China. The continuance of our operations depends upon compliance with, among other things, applicable Chinese environmental, health, safety, labor, social security, pension and other laws and regulations. Failure to comply with such laws and regulations could result in fines, penalties or lawsuits. In addition, there is no assurance that we will be able to comply fully with appli- cable laws and regulations should there be any amend- ment to the existing regulatory regime or implementation of any new laws and regulations. Furthermore, our business and operations in China entail the procurement of licenses and permits from the relevant authorities. 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 busi- ness, results of operations and financial condition may be adversely affected. 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 signifi- cant 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 accor- YUM CHINA – 2019 Form 10-K 37 F o r m 1 0 - K PART I dance 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 trans- fer a portion of their net assets to us in the form of divi- dends. 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 divi- dends, or otherwise fund and conduct our business. 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 govern- ments 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 Hong Kong subsidiary, which is the equity holder of our Chinese sub- sidiaries, 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 declared or earnings expected to be repatriated since 2018 are subject to the reduced withholding tax of 5%. However, if our Hong Kong subsidiary is not consid- ered 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 38 YUM CHINA – 2019 Form 10-K K - 0 1 m r o F 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 ven- ture agreements or other arrangements that we or our sub- sidiaries may enter into in the future may also restrict the ability of our subsidiaries to pay dividends or make distri- butions 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 pur- poses. 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 resi- dent enterprise (i) dividends paid by us to our non-Chinese stockholders would be subject to a 10% div- idend 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 fil- ing 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 man- agement 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 enter- prise 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. We and our stockholders face uncertainty with respect to indirect transfers of equity interests in China resident enterprises through transfer of non-Chinese-holding Enhanced scrutiny by the Chinese tax authorities may have a negative impact on potential acquisitions and dispositions we may pursue in the future. companies. 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 recharacterized 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 com- pany 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 pur- pose. 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 trans- feror fails to pay the taxes and the party obligated to with- hold 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 rele- vant 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 arrange- ments, if it had directly held and transferred such Chinese interests that were indirectly transferred. The China indi- rect 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, pos- sibly with retroactive effect. In addition, the PRC Individ- ual 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 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 trans- actions of our stock by corporate or other non-individual stockholders that have purchased our stock in open mar- ket transactions will not be taxable under the China indi- rect 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 in non-open market transactions may be taxable under the China indi- rect 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 other authorities. Corporate non-individual stockholders may be exempt from taxation under the China indirect transfer rules with respect to and tax YUM CHINA – 2019 Form 10-K 39 F o r m 1 0 - K PART I 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. 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. 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. You may experience difficulties in effecting service of legal process, 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 assets are located in China. In addition, some of our directors and executive officers reside within China. As a result, it may not be possible to effect service of process within the United States or else- where outside of China upon these persons, including with respect to matters arising under applicable U.S. federal and state securities laws. 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 secu- rities 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. K - 0 1 m r o F As of December 31, 2019, we leased approximately 7,300 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 registra- tion or no longer impose fines for failure to register the lease agreements. In addition, our standard lease agree- ments require the lessors to make such registration and, although we have proactively requested that the applica- ble 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 dis- rupted 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. 40 YUM CHINA – 2019 Form 10-K 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 Expro- priation 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 provi- sion 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 gov- ernment. 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 par- ticipate 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 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 continu- ous 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 sub- sidiary 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 pro- ceeds 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 regula- tory uncertainties that could restrict our ability to adopt additional equity incentive plans for our directors and employees under Chinese law. 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 con- nection 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 contrib- ute to the plans in amounts equal to certain percentages of including bonuses and allowances, of their salaries, YUM CHINA – 2019 Form 10-K 41 F o r m 1 0 - K PART I 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 com- ply 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 develop- ment in different locations. If we are subject to late fees or fines in relation to the underpaid employee benefits, our results of operations and financial condition may be adversely affected. The audit report included in this annual report on Form 10-K is prepared by auditors who are not the Public Company currently Accounting Oversight Board and, as such, our stockholders are deprived of the benefits of such inspection. inspected by As an auditor of companies that are publicly traded in the United States and a firm registered with the Public Com- pany Accounting Oversight Board (“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 we have substantial operations within China, our independent reg- istered public accounting firm’s audit documentation related to their audit report included in this annual report on Form 10-K is located in China. The PCAOB is cur- rently unable to conduct full inspections in China or review audit documentation located within China without the approval of Chinese authorities. Inspections of other auditors conducted by the PCAOB outside of China have at times identified deficiencies in those auditors’ audit procedures and quality control pro- cedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections of audit work undertaken in China prevents the PCAOB from regularly evaluating our audi- tor’s audits and its quality control procedures. As a result, stockholders may be deprived of the benefits of PCAOB inspections, and may lose confidence in our reported financial information and procedures and the quality of our financial statements. 42 YUM CHINA – 2019 Form 10-K K - 0 1 m r o F In June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress that would require the SEC to maintain a list of applicable foreign issuers for which the PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased dis- closure requirements for these issuers and, beginning in 2025, securities exchanges, such as the New York Stock Exchange, of issuers included on the SEC’s list for three consecutive years. Enactment of this legislation or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, which may or may not include the Company, and materially and adversely affect the market price of our common stock and our ability to access the capital markets. the delisting from U.S. national Proceedings instituted by the SEC against certain China-based accounting firms, including our registered public accounting firm, independent could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act. In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese member firms of the “big four” accounting firms, including our independent registered public accounting firm. The Rule 102(e) proceedings initiated by the SEC relate to the failure of these firms to produce certain docu- ments, including audit work papers, in response to a request from the SEC pursuant to Section 106 of the Sarbanes-Oxley Act of 2002. The auditors located in China claim they are not in a position lawfully to produce such documents directly to the SEC because of restric- tions under Chinese law and specific directives issued by the China Securities Regulatory Commission (“CSRC”). The issues raised by the proceedings are not specific to our auditor or to us, but potentially affect equally all PCAOB-registered audit firms based in China and all businesses based in China (or with substantial operations in China) with securities listed in the United States. In addition, auditors based outside of China are subject to similar restrictions under Chinese law and CSRC direc- tives in respect of audit work that is carried out in China which supports the audit opinions issued on financial statements of entities with substantial China operations. In January 2014, the administrative judge reached an ini- tial decision that the Chinese member firms of the “big four” accounting firms should be barred from practicing before the SEC for a period of six months. In February 2014, the accounting firms filed a petition for review of the initial decision. In February 2015, the Chinese mem- ber firms of the “big four” accounting firms reached a set- tlement with the SEC. As part of the settlement, each of the “big four” accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute with the SEC. The settlement stays the current proceeding for four years, during which time the firms are required to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. If a firm does not follow the procedures, the SEC may impose penalties such as suspensions, or commence a new, expedited administrative proceeding against any non-compliant firm. The SEC could also restart adminis- trative proceedings against all four firms. If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC, and we are unable to timely find another indepen- dent registered public accounting firm to audit and issue an opinion on our financial statements, our financial state- ments could be determined not to be in compliance with the requirements of the Exchange Act. Such a determina- tion could ultimately lead to delisting of our common stock from the New York Stock Exchange. Moreover, any negative news about the proceedings against these audit firms may adversely affect investor confidence in companies with substantial China-based operations listed on securities exchanges in the United States. All of these factors could materially and adversely affect the market price of our common stock and our ability to access the capital markets. loans regulation of Chinese 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. We are a Delaware holding company conducting our operations in China through our Chinese subsidiaries. We may make loans to our Chinese subsidiaries, or we may make additional capital contributions to our Chinese sub- sidiaries, or we may establish new Chinese subsidiaries and make capital contributions to these new Chinese sub- sidiaries, or we may acquire offshore entities with busi- ness operations in China in an offshore transaction. Most of these uses are subject to Chinese regulations and approvals. For example, 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 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 the China Ministry of Commerce (“MOFCOM”) or its local counterparts. On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improve- ment of the Administration of the Payment and Settle- ment of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the con- version by a foreign-invested enterprise of foreign cur- rency registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142 pro- vides that RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within China with limited exceptions (e.g., by holding companies, venture capital or private equity firms). In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from the foreign currency registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE approval, YUM CHINA – 2019 Form 10-K 43 F o r m 1 0 - K PART I and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Such requirements are also known as the “payment-based foreign currency settlement system” established under SAFE Circular 142. Violations of SAFE Circular 142 could result in monetary or other pen- alties. Furthermore, SAFE promulgated a circular on November 9, 2010, known as Circular 59, and another supplemental circular on July 18, 2011, known as Circular 88, which both tightened the examination of the authen- ticity of settlement of foreign currency capital or net pro- ceeds from overseas listings. SAFE further promulgated the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses, or Circular 45, on November 9, 2011, which expressly prohibited foreign- invested enterprises from using registered capital settled in RMB converted from foreign currencies to grant loans through entrustment arrangements with a bank, repay intercompany loans or repay bank loans that have been transferred to a third party. Circular 142, Circular 59, Cir- cular 88 and Circular 45 may significantly limit our ability to make loans or capital contributions to our Chinese sub- sidiaries and to convert such proceeds into RMB, which may adversely affect our liquidity and our ability to fund and expand our business in China. Furthermore, on April 8, 2015, SAFE promulgated the Circular on the Reform of the Administrative Method of the Settlement of Foreign Currency Capital of Foreign- Invested Enterprises, or Circular 19, which became effec- tive as of June 1, 2015. This Circular 19 is to implement the so-called “conversion-at-will” of foreign currency in capital account, which was established under a circular issued by SAFE on August 4, 2014, or Circular 36, and was implemented in 16 designated industrial parks as a reform pilot. The Circular 19 now implements the conversion-at-will of foreign currency settlement system nationally, and it abolishes the application of Circular 59 and Circular 45 on March 19, 2015 as well as Circular 142, Circular 88 and Circular 36 starting from June 1, 2015. Among other things, under Circular 19, foreign- invested enterprises may either continue to follow the payment-based foreign currency settlement system or elect to follow the conversion-at-will of foreign currency settlement system. Where a foreign-invested enterprise follows the conversion-at-will of foreign currency settle- 44 YUM CHINA – 2019 Form 10-K K - 0 1 m r o F ment system, it may convert any or 100% of the amount of the foreign currency in its capital account into RMB at any time. The converted RMB will be kept in a designated account known as “Settled but Pending Payment Account,” and if the foreign-invested enterprise needs to make further payment from such designated account, it still needs to provide supporting documents and go through the review process with its bank. If under special circumstances the foreign-invested enterprise cannot pro- vide supporting documents in time, Circular 19 grants the banks the power to provide a grace period to the enterprise and make the payment before receiving the supporting documents. The foreign-invested enterprise will then need to submit the supporting documents within 20 work- ing days after payment. In addition, foreign-invested enterprises are now allowed to use their converted RMB to make equity investments in China under Circular 19. However, foreign-invested enterprises are still required to use the converted RMB in the designated account within their approved business scope under the principle of authenticity and self-use. It remains unclear whether a common foreign-invested enterprise, other than such spe- cial types of enterprises as holding companies, venture capital or private equity firms, can use the converted RMB in the designated account to make equity invest- ments if equity investment or similar activities are not within their approved business scope. In light of the various requirements imposed by Chinese regulations on loans to and direct investment in Chinese entities by offshore holding companies as discussed above, we cannot assure you that we will be able to com- plete the necessary government registrations or obtain the necessary government approvals on a timely basis, or at all, with respect to future loans by us to our Chinese sub- sidiaries or with respect to future capital contributions by us to our Chinese subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to capi- talize or otherwise fund our Chinese operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business. Regulations regarding acquisitions may impose significant review requirements, which could make it more difficult for us to pursue growth through acquisitions. regulatory approval and Under the PRC Anti-monopoly Law, companies under- taking certain investments and acquisitions relating to businesses in China must notify the anti-monopoly enforcement agency in advance of any transactions which are deemed a concentration and where the parties’ reve- nues in the China market exceed certain thresholds as stipulated in the Provisions of the State Council on the Thresholds for Declaring Concentration of Business Operators. In addition, on August 8, 2006, six PRC regu- latory agencies, including the MOFCOM, the State- Owned Assets and Administration Commission, the STA, the State Administration for Industry and Commerce of the People’s Republic of China, the CSRC and the SAFE, jointly adopted the Pro- visions of the Ministry of Commerce on M&A of a Domestic Enterprise by Foreign Investors (“M&A Rules”), which came into effect on September 8, 2006 and was amended on June 22, 2009. Under the M&A Rules, the approval of MOFCOM must be obtained in circum- stances where overseas companies established or con- trolled by PRC enterprises or residents acquire domestic companies affiliated with PRC enterprises or residents. Applicable PRC laws, rules and regulations also require Supervision certain merger and acquisition transactions to be subject to security review. of more revenues within China Due to the level of our revenues, our proposed acquisition of control of, or decisive influence over, any company with than RMB400 million in the year prior to any proposed acqui- sition would be subject to the State Administration for Market Regulation (“SAMR”) merger control review. As a result of our size, many of the transactions we may undertake could be subject to SAMR merger review. Complying with the requirements of the relevant regula- tions to complete these transactions could be time- consuming, and any required approval processes, including approval from SAMR, may be uncertain and could delay or inhibit our ability to complete these trans- actions, which could affect our ability to expand our busi- ness maintain our market share or otherwise achieve the goals of our acquisition strategy. Our ability to carry out our investment and acquisition strategy may be materially and adversely affected by the regulatory authorities’ current practice, which creates sig- nificant uncertainty as to the timing of receipt of relevant approvals and whether transactions that we may under- take would subject us to fines or other administrative pen- alties and negative publicity and whether we will be able to complete investments and acquisitions in the future in a timely manner or at all. Risks Related to the Separation and Related Transactions F o r m 1 0 - K the Company could be subject If the distribution does not qualify as a transaction that is generally tax-free for U.S. federal income to tax purposes, significant certain circumstances, the Company could be required to taxes and other indemnify YUM for material to indemnification related amounts pursuant obligations under the tax matters agreement. liabilities, and, tax in The distribution was conditioned on YUM’s receipt of opinions of outside advisors regarding the tax-free treat- ment of the distribution for U.S. federal income tax pur- poses. The opinions relied on various assumptions and representations as to factual matters made by YUM and us which, if inaccurate or incomplete in any material respect, would jeopardize the conclusions reached by such advi- sors in their opinions. The opinions are not binding on the IRS or the courts, and there can be no assurance that the IRS or the courts will not challenge the conclusions stated in the opinions or that any such challenge would not pre- vail. If, notwithstanding receipt of the opinions, the distribution were determined to be a taxable transaction, YUM would be treated as having sold shares of the Company in a tax- able transaction, likely resulting in a significant taxable gain. Pursuant to the tax matters agreement, the Company and YCCL agreed to indemnify YUM for any taxes and YUM CHINA – 2019 Form 10-K 45 PART I related losses resulting from any breach of covenants regarding the preservation of the tax-free status of the dis- tribution, certain acquisitions of our equity securities or assets, or those of certain of our affiliates or subsidiaries, and any breach by us or any member of our group of cer- tain representations in the documents delivered by us in connection with the distribution. Therefore, if the distri- bution fails to qualify as a transaction that is generally tax-free as a result of one of these actions or events, we may be required to make material payments to YUM under this indemnity. YUM may be subject to Chinese indirect transfer tax with respect to the distribution, in which event we could be required to indemnify YUM for material to indemnification obligations under the tax matters agreement. taxes and related amounts pursuant As noted above, Bulletin 7 provides that in certain cir- cumstances a non-resident enterprise may be subject to Chinese enterprise income tax on an “indirect transfer” of Chinese interests. YUM concluded, and we concurred, that it believes that the distribution had a reasonable com- mercial purpose and that it is more likely than not that YUM will not be subject to this tax with respect to the dis- tribution. However, there are uncertainties regarding the circumstances in which the tax will apply, and there can be no assurances that the Chinese tax authorities will not seek to impose this tax on YUM. Pursuant to the tax matters agreement, the Company and YCCL have agreed to indemnify YUM for a portion (tied to the relative market capitalization of YUM and the Com- pany during the 30 trading days after the distribution) of any taxes and related losses resulting from the application of Bulletin 7 to the distribution. Alternatively, if Bulletin 7 applies to the distribution as a result of a breach by the Company or Company group members of certain repre- sentations or covenants, or due to certain actions of the Company or Company group members following the dis- tribution, the Company and YCCL generally will indem- nify YUM for all such taxes and related losses. Therefore, if YUM is subject to such Chinese tax with respect to the dis- tribution, we may be required to make material payments to YUM under this indemnity. Such payments could have a material adverse effect on our financial condition. 46 YUM CHINA – 2019 Form 10-K K - 0 1 m r o F to the Potential indemnification liabilities owing to YUM pursuant separation and distribution agreement could materially and adversely affect our results of operations and financial business, condition. The separation and distribution agreement provides for, among other things, indemnification obligations generally designed to make us financially responsible for (i) certain liabilities associated with our business; (ii) our failure to pay, perform or otherwise promptly discharge any liabil- ities or contracts relating to the Company business, in accordance with their respective terms, whether prior to, at or after the distribution; (iii) any guarantee, indemnifi- cation obligation, surety bond or other credit support agreement, arrangement, commitment or understanding by YUM for our benefit, unless related to liabilities pri- marily associated with the YUM business; (iv) certain tax liabilities; (v) any breach by us of the separation and dis- tribution agreement or any of the ancillary agreements or any action by us in contravention of our amended and restated certificate of incorporation or amended and restated bylaws; and (vi) any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in the information statement relating to the distribution or any other disclosure document that describes the separa- tion or the distribution or the Company and its subsidiar- ies or primarily relates to the transactions contemplated by the separation and distribution agreement, subject to cer- tain exceptions. If we are required to indemnify YUM under the circumstances set forth in the separation and distribution agreement, we may be subject to substantial liabilities. In connection with the separation, YUM has agreed to indemnify us for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or that YUM’s ability to satisfy its indemnification obligation will not be impaired in the future. Pursuant to the separation and distribution agreement and certain other agreements we entered into with YUM, YUM has agreed to indemnify us for certain liabilities set forth in the separation and distribution agreement. How- ever, third parties could also seek to hold us responsible for any of the liabilities that YUM has agreed to retain, and there can be no assurance that the indemnity from YUM will be sufficient to protect us against the full amount of such liabilities, or that YUM will be able to fully satisfy its indemnification obligations. In addition, YUM’s insurers may attempt to deny us coverage for liabilities associated with certain occurrences of indemni- fied liabilities prior to the separation. Moreover, even if we ultimately succeed in recovering from YUM or such insurance providers any amounts for which we are held liable, we may be temporarily required to bear these losses. Each of these risks could negatively affect our business, results of operations, financial condition and cash flows. A court could require that we assume responsibility for obligations allocated to YUM under the separation and distribution agreement. Under the separation and distribution agreement and related ancillary agreements, from and after the separa- tion, each of YUM and the Company will be generally responsible for the debts, liabilities and other obligations related to the business or businesses which they own and operate following the consummation of the separation. Although we do not expect to be liable for any obligations that are not allocated to us under the separation and distri- bution agreement, a court could disregard the allocation agreed to between the parties, and require that we assume responsibility for obligations allocated to YUM (for example, tax and/or environmental liabilities), particu- larly if YUM were to refuse or were unable to pay or per- form the allocated obligations. Potential liabilities may arise due to fraudulent transfer considerations, which would adversely affect our results of operations and financial condition. In connection with the separation and distribution, YUM completed several corporate reorganization transactions involving its subsidiaries which, along with the separation and distribution, may be subject to federal and state fraud- ulent conveyance and transfer laws. If, under these laws, a court were to determine that, at the time of the separation and distribution, any entity involved in these reorganiza- tion transactions or the separation and distribution: • was insolvent; • was rendered insolvent by reason of the separation and distribution or a related transaction; • had remaining assets constituting unreasonably small capital; or • intended to incur, or believed it would incur, debts beyond its ability to pay these debts as they matured, then the court could void the separation and distribution, in whole or in part, as a fraudulent conveyance or transfer. The court could then require our stockholders to return to YUM some or all of the shares of Company common stock issued in the distribution, or require YUM or the Company, as the case may be, to fund liabilities of the other company for the benefit of creditors. The measure of insolvency will vary depending upon the jurisdiction whose law is being applied. Generally, however, an entity would be considered insolvent if the fair value of its assets was less than the amount of its liabilities, or if it was unable to pay its liabilities as they mature. F o r m 1 0 - K YUM CHINA – 2019 Form 10-K 47 PART I Risks Related to Our Common Stock The Company’s significantly. stock price may fluctuate The market price of Company common stock may decline or fluctuate significantly due to a number of fac- tors, some of which may be beyond our control, includ- ing: • actual or anticipated fluctuations in the our results of operations; • significant liability claims, health concerns, food con- tamination complaints from our customers, shortages or interruptions in the availability of food or other sup- plies, or reports of incidents of food tampering; • foreign exchange issues; • the operating and stock price performance of compara- ble companies; • changes in the Company’s stockholder base due to the separation; • changes in the regulatory, legal and political environ- ment in which we operate; or • market conditions in the restaurant industry and the domestic and worldwide economies as a whole. The Company cannot guarantee the timing or amount of dividends on, or repurchases of, its common stock. We intend to retain a significant portion of our earnings to finance the operation, development and growth of our business. Our board of directors commenced a quarterly cash dividend in October 2017. However, any future determination to declare and pay cash dividends will be at the discretion of our board of directors and will depend on, among other things, our financial condition, results of operations, actual or anticipated cash requirements, tax considerations, contractual or regulatory restrictions and K - 0 1 m r o F 48 YUM CHINA – 2019 Form 10-K such other factors as our board of directors deems rele- vant. Our board of directors has also authorized a $1.4 billion share repurchase program. However, repur- chases under the program will be at the discretion of man- agement and we cannot guarantee the timing or amount of any share repurchases. For more information, see Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.” Your percentage of ownership in the Company may be diluted in the future. In the future, your percentage ownership in the Company may be diluted because of equity awards that we grant to our directors, officers and employees or otherwise as a result of equity issuances for acquisitions or capital mar- ket transactions. The Company’s and certain of YUM’s employees have equity awards with respect to Company common stock as a result of conversion of their YUM equity awards (in whole or in part) to Company equity awards in connection with the distribution. From time to time, the Company will issue additional stock-based awards to its employees under the Company’s employee benefit plans. Such awards will have a dilutive effect on the Company’s earnings per share, which could adversely affect the market price of Company common stock. In addition, our amended and restated certificate of incor- poration authorizes us to issue, without the approval of the Company’s stockholders, one or more classes or series of preferred stock that have such designation, powers, pref- erences and relative, participating, optional and other spe- cial rights, including preferences over Company common stock respecting dividends and distributions, as our board of directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of Company common stock. Similarly, the repurchase or redemption rights or liquidation preferences we could assign to holders of pre- ferred stock could affect the residual value of the common stock. The interests of the Investors may differ from the interests of other holders of Company common stock, and the ownership percentage of other holders of Company common stock will be diluted as a result of any exercise of the warrants issued to the Investors. In connection with the separation and distribution, Pollos Investment L.P., an affiliate of Primavera Capital Group (“Primavera”), and API (Hong Kong) Investment Lim- ited, an affiliate of Zhejiang Ant Small and Micro Finan- cial Services Group Co., Ltd. (“Ant Financial” and together with Primavera, the “Investors”) received shares of common stock, representing approximately 4.9% of the outstanding shares of Company common stock as of December 31, 2019. In addition, the Investors were issued warrants to purchase approximately 4% of the outstand- ing shares of Company common stock in January 2017. Primavera has disclosed that, in the fourth quarter of 2019, it entered into pre-paid forward sale transactions with several financial institutions pursuant to which Pri- mavera is obligated to deliver to such counterparties a portion of its warrants on the applicable settlement date. As of December 31, 2019, the Investors held warrants to purchase approximately 2.5% of the outstanding shares of Company common stock. Any shares issued as a result of the exercise of the warrants will have a dilutive effect on the Company’s basic earnings per share, which could adversely affect the market price of Company common stock. In addition, the Investors have the ability to acquire additional shares of Company common stock in the open market (subject to an aggregate beneficial ownership interest limit of 19.9%). The interests of the Investors may differ from those of other holders of Company common stock in material respects. For example, the Investors may have an interest in pursuing acquisitions, divestitures, financings or other transactions that could enhance their respective equity portfolios, even though such transactions might involve risks to holders of Company common stock. The Inves- tors may, from time to time in the future, acquire interests in businesses that directly or indirectly compete with cer- tain portions of the Company’s business or are suppliers or customers of the Company. Additionally, the Investors may determine that the disposition of some or all of their interests in the Company would be beneficial to the Investors at a time when such disposition could be detri- mental to the other holders of Company common stock. in our organizational Anti-takeover provisions documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable. Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions, sum- marized below, that could make it more difficult to acquire control of the Company by means of a tender offer, a proxy contest or otherwise, or to remove incum- bent officers and directors. Further, as a Delaware corpo- ration, we are subject to provisions of Delaware law, which may impair a takeover attempt that our stockhold- ers may find beneficial. These provisions might discour- age certain types of coercive takeover practices and takeover bids that our board of directors may consider inadequate or delay acquisition attempts for us that hold- ers of Company common stock might consider favorable. • Our amended and restated bylaws provide that such bylaws may be amended by our board of directors or by the affirmative vote of a majority of our stockholders entitled to vote. • Our amended and restated certificate of incorporation provides that only our board of directors (or the chair- man of our board of directors, our CEO or our secretary with the concurrence of a majority of our board of directors) may call special meetings of our stockhold- ers. F o r m 1 0 - K • Our amended and restated certificate of incorporation expressly eliminates the right of our stockholders to act by written consent. Accordingly, stockholder action must take place at the annual or a special meeting of our stockholders. • Our amended and restated bylaws establish advance notice procedures with respect to stockholder proposals and nomination of candidates for election as directors other than nominations made by or at the direction of our board of directors or a committee of our board of directors. YUM CHINA – 2019 Form 10-K 49 PART I • Our amended and restated certificate of incorporation does not provide for cumulative voting, which means that stockholders are denied the right to cumulate votes in the election of directors. • Our board of directors has the authority to issue pre- ferred stock, which could potentially be used to dis- courage attempts by third parties to obtain control of our company through a merger, tender offer, proxy contest or otherwise by making such attempts more difficult or more costly. K - 0 1 m r o F 50 YUM CHINA – 2019 Form 10-K ITEM 1B. Unresolved Staff Comments. Not applicable. ITEM 2. Properties. As of year-end 2019, the Company leased land, building or both for over 7,300 units in China, which unit count includes land use rights for approximately 40 properties. The Company-owned units are further detailed as follows: • KFC leased land, building or both (including land use rights) for approximately 5,083 units. • Pizza Hut leased land, building or both (including land use rights) for approximately 2,178 units. • All Other Segments leased land, building or both (including land use rights) for approximately 94 units. Company-owned restaurants in China are generally leased for initial terms of 10 to 20 years and generally do not have renewal options. The Company also leases its corporate headquarters in Shanghai and Dallas, Texas, and regional offices and an innovation center in China, and owns land use rights for six non-store properties of Little Sheep and logistic cen- ters. The Company subleases over 170 properties to franchisees and other third parties. Additional information about the Company’s properties is included in Note 11 to the Consolidated Financial Statements in Part II, Item 8. The Company believes that its properties are generally in good operating condition and are suitable for the purposes for which they are being used. ITEM 3. Legal Proceedings. The Company is subject to various lawsuits covering a variety of allegations from time to time. The Company believes that the ultimate liability, if any, in excess of amounts already provided for these matters in the Consolidated Financial Statements, is not likely to have a material adverse effect on the Company’s annual results of operations, financial condi- tion or cash flows. Matters faced by the Company from time to time include, but are not limited to, claims from landlords, employees, customers and others related to operational, contractual or employment issues. There were no material legal proceedings as of December 31, 2019. F o r m 1 0 - K ITEM 4. Mine Safety Disclosures. Not applicable. YUM CHINA – 2019 Form 10-K 51 PART II ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market for Yum China Common Stock Yum China common stock trades on the New York Stock Exchange (“NYSE”) under the symbol YUMC. Yum China common stock commenced trading on the NYSE on a “when-issued” basis on October 17, 2016 and began “regular way” trading on November 1, 2016. As of February 21, 2020, there were 44,599 holders of record of Yum China’s common stock. The number of registered holders does not include holders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. Dividends and Share Repurchases K - 0 1 m r o F We intend to retain a significant portion of our earnings to finance the operation, development and growth of our busi- ness. Since declaring an initial dividend of $0.10 per share in the fourth quarter of 2017, we have paid a quarterly cash dividend on Yum China common stock. In the fourth quarter of 2018 and each quarter of 2019, we paid a quarterly cash dividend of $0.12 per share. Cash dividends totaling $181 million were paid to shareholders in 2019. Any determination to declare and pay future cash dividends will be at the discretion of our board of directors and will depend on, among other things, our financial condition, results of operations, actual or anticipated cash requirements, contractual or regula- tory restrictions, tax considerations and such other factors as our board of directors deems relevant. In addition, our ability to declare and pay any dividends on our stock may be restricted by earnings available for distribu- tion under applicable Chinese laws. The laws, rules and regulations applicable to our Chinese subsidiaries permit pay- ments of dividends only out of their accumulated profits, if any, determined in accordance with applicable Chinese accounting standards and regulations. 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 allo- cate 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. 52 YUM CHINA – 2019 Form 10-K Our Board of Directors has authorized an aggregate of $1.4 billion for our share repurchase program, including its most recent increase in authorization on October 31, 2018. Yum China may repurchase shares under this program from time to time in open market or privately negotiated transactions, including block trades, accelerated share repurchase transac- tions and the use of Rule 10b5-1 trading plans. The following table provides information, as of December 31, 2019, with respect to shares of common stock repurchased by Yum China under the authorization during the quarter then ended: Total Number of Shares Purchased (thousands) Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (thousands) Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (millions) 526 466 309 1,302 $ $ $ $ 43.69 42.94 45.87 43.94 526 466 309 1,302 $ $ $ $ 733 713 699 699 Period 10/1/19-10/31/19 11/1/19-11/30/19 12/1/19-12/31/19 Cumulative total Stock Performance Graph This graph compares the cumulative total return of our common stock from October 17, 2016, which is the date “when- issued” trading in our common stock commenced, through December 31, 2019, with the comparable cumulative total return of the S&P China BMI and MSCI Asia APEX 50, a peer group that includes the Company. The graph assumes that the value of the investment in our common stock and each index was $100 on October 17, 2016 and that all divi- dends were reinvested. We selected the S&P China BMI and MSCI Asia APEX 50 for comparison, as YUMC is an index member of both of these indices. YUMC S&P China BMI MSCI Asia APEX 50 $200 $180 $160 $140 $120 $100 $80 10/17/2016 12/31/2016 12/31/2017 12/31/2018 12/31/2019 F o r m 1 0 - K YUMC S&P China BMI MSCI Asia APEX 50 10/17/2016 12/31/2016 6/30/2017 12/31/2017 6/30/2018 12/31/2018 6/30/2019 12/31/2019 187 $ 139 $ 139 $ 102 95 96 150 139 132 154 115 120 156 141 139 180 129 126 131 114 113 100 100 100 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ YUM CHINA – 2019 Form 10-K 53 PART II ITEM 6. Selected Financial Data. The following table presents our selected historical consolidated and combined financial data. We derived the Consoli- dated Statements of Income data and the Consolidated Cash Flows data for the years ended December 31, 2019, 2018 and 2017, and the Consolidated Balance Sheets data as of December 31, 2019 and 2018, as set forth below, from our audited Consolidated Financial Statements, which are included elsewhere in this Form 10-K. We derived the Consoli- dated and Combined Statements of Income data and the Consolidated and Combined Cash Flows data for the years ended December 31, 2016 and 2015, Consolidated Balance Sheets data as of December 31, 2017 and 2016 and the Com- bined Balance Sheets data as of December 31, 2015, as set forth below, from our audited Consolidated and Combined Financial Statements that are not included in this Form 10-K. Our combined financial information for periods prior to the separation may not necessarily reflect our financial position, results of operations or cash flows as if we had operated as an independent public company during the periods prior to October 31, 2016, including changes that occurred in our operations and capitalization as a result of the separation from YUM and the distribution. Accordingly, our historical combined results should not be relied upon as an indicator of our future performance. The Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”) on January 1, 2019, using a modified retrospective method. Accordingly, financial data for the years ended December 31, 2018, 2017, 2016 and 2015 were not recast, which impacts the year-to-year comparability. See Note 2 and Note 11 of the Consolidated Financial Statements for more detailed information regarding adoption of the new lease standard. The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”) on January 1, 2018, and applied the full retrospective approach. Accordingly, financial data for the years ended December 31, 2017 and 2016 has been recast. Financial data for the years ended December 31, 2015 has not been recast as permitted, which impacts the year-to-year comparability. K - 0 1 m r o F The following tables should be read together with, and are qualified in their entirety by reference to, the historical Con- solidated and Combined Financial Statements and the related notes included elsewhere in this Form 10-K. Among other things, the historical Consolidated and Combined Financial Statements include more detailed information regarding the basis of presentation for the information in the following table. The tables should also be read together with the sections entitled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.” 54 YUM CHINA – 2019 Form 10-K Selected Financial Data Yum China Holdings, Inc. (in US$ millions, except per share and unit amounts) Consolidated and Combined Statements of Income Data: Revenues Company sales Franchise fees and income Revenues from transactions with franchisees and unconsolidated affiliates Other revenues Total revenues Costs and Expenses, Net Company restaurants Food and paper Payroll and employee benefits Occupancy and other operating expenses Company restaurant expenses General and administrative expenses Franchise expenses Expenses for transactions with franchisees and unconsolidated affiliates Other operating costs and expenses Closures and impairment expenses, net Other income, net Total costs and expenses, net Operating Profit Interest income, net Investment gain (loss) Changes in fair value of financial instruments Income Before Income Taxes Income tax provision Net income—including noncontrolling interests Net income—noncontrolling interests Net Income—Yum China Holdings, Inc. Basic Earnings Per Common Share Diluted Earnings Per Common Share Cash Dividends Declared Per Common Share Consolidated and Combined Cash Flow Data: Net cash provided by operating activities Capital spending Consolidated and Combined Balance Sheet Data: Total assets Property, plant and equipment, net Operating lease right-of-use assets Total Equity—Yum China Holdings, Inc. Other Data: Adjusted Diluted Earnings Per Common Share(a) Number of stores at year-end Company Unconsolidated Affiliates Franchisees Total Total Company system sales growth (decline)(b) Reported Local currency(c) KFC system sales growth (decline)(b) Reported Local currency(c) Pizza Hut system sales growth (decline)(b) Reported Local currency(c) For the Years Ended December 31, 2017 2016 2018 2019 2015 $ 7,925 $ 148 7,633 $ 141 6,993 $ 141 6,622 $ 129 6,789 120 654 49 8,776 2,479 1,807 2,373 6,659 487 71 645 37 36 (60) 7,875 901 39 63 — 1,003 (260) 743 30 713 1.89 1.84 0.48 603 38 8,415 2,326 1,714 2,394 6,434 456 71 595 29 41 (152) 7,474 941 36 (27) — 950 (214) 736 28 708 1.84 1.79 0.42 599 36 7,769 2,034 1,543 2,245 5,822 495 71 592 28 47 (64) 6,991 778 25 — — 803 (379) 424 26 398 1.03 1.00 0.10 299 25 — — 7,075 6,909 1,921 1,432 2,259 5,612 429 72 295 15 78 (60) 6,441 634 11 — 21 666 (156) 510 12 498 1.35 1.35 — 2,159 1,386 2,386 5,931 395 70 — — 64 (39) 6,421 488 8 — — 496 (168) 328 5 323 0.89 0.89 — 913 512 F o r m 1 0 - K $ $ $ 1,185 $ 435 1,333 $ 470 884 $ 415 866 $ 436 6,950 $ 1,594 1,985 3,077 4,610 $ 1,615 — 2,873 4,287 $ 1,691 — 2,765 3,750 $ 1,647 — 2,367 3,201 1,841 — 1,921 1.88 $ 1.53 $ 1.40 $ 1.27 $ 0.92 7,355 896 949 9,200 6,832 811 841 8,484 6,307 891 785 7,983 6,008 836 718 7,562 5,768 796 612 7,176 4% 9% 6% 11% (2)% 3% 7% 5% 10% 7% 1% (1)% 6% 8% 7% 9% 5% 7% (1)% 5% —% 6% (2)% 4% —% 2% (2)% —% 9% 11% YUM CHINA – 2019 Form 10-K 55 PART II (a) (b) In addition to the results provided in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) throughout this Form 10-K, the Company provides adjusted measures which present certain operating results on a basis before Special Items. The Company uses adjusted measures as key performance measures of results of oper- ations for the purpose of evaluating performance internally and Special Items are not included in any of our seg- ment results. The adjusted measures are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of measures adjusted for Special Items provides additional information to investors to facilitate the comparison of past and present results, exclud- ing items that the Company does not believe are indicative of our ongoing operations due to their nature. The 2019, 2018 and 2017 Special Items are described in further detail within our Management’s Discussion and Anal- ysis of Financial Condition and Results of Operations. Special Items in 2016 negatively impacted operating profit by $15 million, or $0.08 per share, primarily due to the incremental restaurant-level impairment upon separation. Special Items in 2015 negatively impacted operating profit by $15 million, or $0.03 per share, due to the provision for losses associated with sales of aircraft. System sales growth reflects the results of all restaurants regardless of ownership, including Company-owned, franchise and unconsolidated affiliate restaurants that operate our concepts, except for sales from non-Company- owned restaurants, for which we do not receive a sales-based royalty. Sales of franchise and unconsolidated affili- ate restaurants typically generate ongoing franchise fees for the Company at a rate of approximately 6% of system sales. Franchise and unconsolidated affiliate restaurants sales are not included in Company sales in the Consoli- dated and Combined Statements of Income; however, the franchise fees are included in the Company’s revenues. We believe system sales growth is useful to investors as a significant indicator of the overall strength of our busi- ness as it incorporates all of our revenue drivers, Company and franchise same-store sales as well as net unit growth. (c) Local currency represents the percentage change excluding the impact of foreign currency translation. These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimi- nation of the foreign currency translation impact provides better year-to-year comparability without distorting of foreign currency fluctuations. K - 0 1 m r o F 56 YUM CHINA – 2019 Form 10-K ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with the Consolidated Financial Statements in Item 8, the “Forward-Looking Statements” section at the beginning of this Form 10-K and the “Risk Factors” section set forth in Item 1A. All Note references in this MD&A refer to the Notes to the Consolidated Financial Statements included in Item 8. of this Form 10-K. Tabular amounts are displayed in millions of U.S. dollars except per share and unit count amounts, or as oth- erwise specifically identified. Percentages may not recompute due to rounding. Throughout this Form 10-K when we refer to the “financial statements,” we are referring to the “Consolidated Financial Statements,” unless the context indi- cates otherwise. Overview Yum China Holdings, Inc. is the largest restaurant company in China in terms of system sales, with $8.8 billion of reve- nues and 9,200 restaurants as of year-end 2019. Our growing restaurant base consists of our flagship KFC and Pizza Hut brands, as well as emerging brands such as Little Sheep, COFFii & JOY, East Dawning and Taco Bell. 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, Taiwan and Macau), and own the intellectual property of the Little Sheep, COFFii & JOY and East Dawning concepts outright. We were the first major global restaurant brand to enter China in 1987 and with over 30 years of operations, we have developed deep operating experience in the China market. We have since grown to become one of China’s largest restaurant developers with locations in over 1,300 cities as of December 31, 2019. We believe that there is significant opportunity to expand within China, and we intend to focus our efforts on increasing our geographic footprint in both existing and new cities. KFC is the leading and the largest QSR brand in China in terms of system sales. As of December 31, 2019, KFC operated over 6,500 restaurants in more than 1,300 cities across China. KFC primarily competes with Western QSR brands in China, such as McDonald’s, Dicos and Burger King, among which we believe KFC has an approximate two-to-one lead over its nearest competitor in terms of store count as of the end of 2019. During the first quarter of 2018, the Company completed the acquisition of an additional 36% interest in an unconsolidated affiliate that operates KFC stores in Wuxi, China (“Wuxi KFC”), increasing our equity interest to 83% and allowing the Company to consolidate the entity. F o r m 1 0 - K Pizza Hut is the leading and the largest CDR brand in China in terms of system sales and number of restaurants. As of December 31, 2019, Pizza Hut operated over 2,200 restaurants in over 500 cities. Measured by number of restaurants, we believe Pizza Hut has an approximate five-to-one lead over its nearest CDR competitor in China as of the end of 2019. We have two reportable segments: KFC and Pizza Hut. Our remaining operating segments, including the operations of Little Sheep, East Dawning, Taco Bell, Daojia, newly developed COFFii & JOY and our e-commerce business, with the latter two becoming operating segments starting from the first quarter of 2019, are combined and referred to as All Other Segments, as those operating segments are insignificant both individually and in the aggregate. Segment financial infor- mation for prior years has been recast to align with this change in segment reporting. There was no impact to the consoli- dated financial statements of the Company as a result of this change. Additional details on our reportable operating segments are included in Note 17. YUM CHINA – 2019 Form 10-K 57 PART II We intend for this MD&A to provide the reader with information that will assist in understanding our results of opera- tions, including metrics that management uses to assess the Company’s performance. Throughout this MD&A, we dis- cuss the following performance metrics: • The Company provides certain percentage changes excluding the impact of foreign currency translation (“F/X”). These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the F/X impact provides better year-to-year comparability without the distortion of foreign currency fluctuations. • System sales growth reflects the results of all restaurants regardless of ownership, including Company-owned, fran- chise and unconsolidated affiliate restaurants that operate our concepts, except for sales from non-Company-owned restaurants, for which we do not receive a sales-based royalty. Sales of franchise and unconsolidated affiliate restau- rants typically generate ongoing franchise fees for the Company at a rate of approximately 6% of system sales. Fran- chise and unconsolidated affiliate restaurant sales are not included in Company sales in the Consolidated Statements of Income; however, the franchise fees are included in the Company’s revenues. We believe system sales growth is use- ful to investors as a significant indicator of the overall strength of our business as it incorporates all of our revenue driv- ers, Company and franchise same-store sales as well as net unit growth. • Effective January 1, 2018, the Company revised its definition of same-store sales growth to represent the estimated percentage change in sales of food of all restaurants in the Company system that have been open prior to the first day of our prior fiscal year. We refer to these as our “base” stores. Previously, same-store sales growth represented the esti- mated percentage change in sales of all restaurants in the Company system that have been open for one year or more, and the base stores changed on a rolling basis from month to month. This revision was made to align with how man- agement measures performance internally and focuses on trends of a more stable base of stores. Prior years have been adjusted accordingly. • Company Restaurant profit (“Restaurant profit”) is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales. Company restaurant margin percentage is defined as Res- taurant profit divided by Company sales. Within the Company Sales and Restaurant Profit analysis, Store Portfolio Actions represent the net impact of new-unit openings, acquisitions, refranchising and store closures, and Other pri- marily represents the impact of same-store sales as well as the impact of changes in restaurant operating costs such as inflation/deflation. • In addition to the results provided in accordance with GAAP throughout this MD&A, the Company provides mea- sures adjusted for Special Items, which include Adjusted Operating Profit, Adjusted Net Income, Adjusted Earnings Per Common Share, Adjusted Effective Tax Rate and Adjusted EBITDA, which we define as net income including noncontrolling interests adjusted for income tax, interest income, net, investment gain or loss, depreciation and amor- tization, and other items, including store impairment charges and Special Items. Special Items for the years ended December 31, 2019, 2018 and 2017 consist of impairment on intangible assets and goodwill attributable to the Daojia business, impact from the U.S. Tax Cuts and Jobs Act (the “Tax Act”), gain recognized from the re-measurement of our previously held equity interest in Wuxi KFC at fair value upon acquisition, and income from the reversal of con- tingent consideration previously recorded for a business combination. The Company excludes impact from Special Items for the purpose of evaluating performance internally. Special Items are not included in any of our segment results. In addition, the Company provides Adjusted EBITDA because we believe that investors and analysts may find it useful in measuring operating performance without regard to items such as income tax, interest income, net, invest- ment gain or loss, depreciation and amortization, and other items, including store impairment charges and Special Items. These adjusted measures are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of these adjusted measures provides additional information 58 YUM CHINA – 2019 Form 10-K K - 0 1 m r o F to investors to facilitate the comparison of past and present results, excluding those items that the Company does not believe are indicative of our ongoing operations due to their nature. Results of Operations Summary All comparisons within this summary are versus the same period a year ago. All system sales growth, same-store sales growth, operating profit and net income comparisons exclude the impact of foreign currency. Refer to Item 1. Business for a discussion on the seasonality of our operations. In 2017, the Company’s total revenues increased 10%, or 12% excluding the impact of F/X, attributable to solid sales performance at KFC with same-store sales growth of 5% and 1% same-store sales growth at Pizza Hut. The increase was also attributable to the increase in Revenues from transactions with franchisees and unconsolidated affiliates, new-unit openings of 691 or 6% net unit growth, bringing total store count to 7,983 across more than 1,200 cities. The increase in operating profit, excluding the impact of F/X, was driven by strong sales and margin expansion, which was also aided by the impact of retail tax structure reform. Net income for 2017 decreased 20% and, excluding the estimated one-time income tax charge of $164 million recorded in the fourth quarter 2017 related to the Tax Act, increased 24%, excluding F/X. In 2018, the Company’s total revenues increased 8%, or 6% excluding the impact of F/X, attributable to solid sales per- formance at KFC with same-store sales growth of 2%. The increase was also attributable to new-unit openings of 819 or 6% net unit growth, bringing total store count to 8,484 across more than 1,200 cities. The increase in operating profit, excluding the impact of F/X, was driven by strong sales, a gain recognized from re-measurement of our previously held equity interest in Wuxi KFC at fair value upon acquisition, G&A expenses savings and productivity improvements, par- tially offset by wage and commodity inflation, and higher investment in product upgrades and promotions. Net income for 2018 increased 78% or 70% excluding F/X, mainly due to the increase in operating profit and impact from the Tax Act, partially offset by investment loss, while Adjusted Net Income, excluding F/X, increased 4%. In 2019, the Company’s total revenues increased 4%, or 9% excluding the impact of F/X, attributable to solid sales per- formance at KFC with same-store sales growth of 4% and 1% same-store sales growth at Pizza Hut. The increase was also attributable to new-unit openings of 1,006 or 8% net unit growth, bringing total store count to 9,200 in more than 1,300 cities. The increase in operating profit, excluding the impact of F/X, was primarily driven by strong sales and mar- gin expansion, partially offset by the negative impact from lapping a gain recognized from re-measurement of our previ- ously held equity interest in Wuxi KFC at fair value upon acquisition in 2018, and higher G&A expenses in 2019. Net income for 2019 increased 1% or 6%, excluding F/X, mainly due to investment gain and the increase in operating profit, partially offset by the impact from the Tax Act, while Adjusted Net Income, excluding F/X, increased 26%. F o r m 1 0 - K 2019 financial highlights are below: Year to date highlights: KFC Pizza Hut All Other Segments(b) Total % Change Same-Store Sales(a) Net New Units +4 +1 (12) +3 +11 +2 +15 +8 System Sales(a) +11 +3 +7 +9 Operating Profit (Reported) +6 +17 (13) (4) Operating Profit (Ex F/X) +11 +22 (17) +1 YUM CHINA – 2019 Form 10-K 59 PART II NM refers to changes over 100%, from negative to positive amounts or from zero to an amount. (a) System Sales and Same-Store Sales percentages as shown in 2019 financial highlights exclude the impact of F/X. (b) Sales from non-Company-owned restaurants, for which we do not receive a sales-based royalty, are excluded from system sales and same-store sales. The Consolidated Results of Operations for the years ended December 31, 2019, 2018 and 2017 are presented below: Company sales Franchise fees and income Revenues from transactions with franchisees and unconsolidated affiliates Other revenues Total revenues Restaurant profit Restaurant margin % Operating Profit Interest income, net Investment gain (loss) Income tax provision Net income—including noncontrolling interests Net income—noncontrolling interests Net Income—Yum China Holdings, Inc. Diluted Earnings Per Common Share Effective tax rate Adjusted Operating Profit Adjusted Net Income Adjusted Diluted Earnings Per Common Share 2019 Year 2018 % B/(W)(a) 2019 2018 2017 Reported Ex F/X Reported Ex F/X $ 7,925 148 $ 7,633 141 $ 6,993 141 654 49 603 38 599 36 $ 8,776 $ 8,415 $ 7,769 $ 1,266 $ 1,199 $ 1,171 4 5 9 31 4 6 9 9 13 34 9 11 9 1 NM 4 8 2 7 (2) NM 4 6 (1) 16.0% 15.7% 16.7% 0.3 ppts. 0.3 ppts. (1.0) ppts. (1.0) ppts. (4) 7 NM (21) 1 (6) 1 3 1 12 NM (26) 6 (11) 6 8 21 47 NM 43 74 (7) 78 79 16 44 NM 45 66 (4) 70 71 $ $ $ $ $ $ 901 39 63 (260) 743 30 713 1.84 $ $ $ 941 36 (27) (214) 736 28 708 1.79 $ $ $ 778 25 — (379) 424 26 398 1.00 25.9% 22.6% 47.2% 912 729 $ $ 855 606 $ $ 775 559 1.88 $ 1.53 $ 1.40 Adjusted Effective Tax Rate 24.9% 26.5% 26.9% Adjusted EBITDA $ 1,378 $ 1,340 $ 1,242 (a) Represents year-over-year change in percentage. Performance Metrics System Sales Growth System Sales Growth, excluding F/X Same-store Sales Growth 2019 2018 4% 9% 3% 7% 5% 1% % Increase Unit Count 2019 2018 2017 2019 2018 Company-owned Unconsolidated affiliates Franchisees 60 YUM CHINA – 2019 Form 10-K 7,355 896 949 9,200 6,832 811 841 8,484 6,307 891 785 7,983 8 10 13 8 8 (9) 7 6 K - 0 1 m r o F Special Items Special Items, along with the reconciliation of the most directly comparable GAAP financial measures to the adjusted financial measures, are presented below. Detail of Special Items Daojia impairment(a) Gain from re-measurement of equity interest upon acquisition(b) Income from the reversal of contingent consideration(c) Special Items, Operating Profit Tax effect on Special Items(d) Impact from the Tax Act(e) Special Items, net income—including noncontrolling interests Special Items, net income—noncontrolling interests(a) Special Items, Net Income—Yum China Holdings, Inc. Weighted-Average Diluted Shares Outstanding (in millions) Special Items Diluted Earnings Per Common Share Reconciliation of Operating Profit to Adjusted Operating Profit Operating Profit Special Items, Operating Profit Adjusted Operating Profit Reconciliation of Net Income to Adjusted Net Income Net Income—Yum China Holdings, Inc. Special Items, Net Income—Yum China Holdings, Inc. Adjusted Net Income—Yum China Holdings, Inc. Reconciliation of EPS to Adjusted EPS Basic Earnings Per Common Share Special Items, Basic Earnings Per Common Share Adjusted Basic Earnings Per Common Share Diluted Earnings Per Common Share Special Items, Diluted Earnings Per Common Share Adjusted Diluted Earnings Per Common Share Year Ended 2019 2018 2017 $ $ $ $ $ $ $ $ $ $ $ (11) — — (11) 1 (8) (18) (2) (16) 388 (0.04) 901 (11) 912 713 (16) 729 1.89 (0.04) 1.93 1.84 (0.04) 1.88 $ $ $ $ $ $ $ $ $ $ $ (12) 98 — 86 (21) 36 101 (1) 102 395 0.26 941 86 855 708 102 606 1.84 0.26 1.58 1.79 0.26 1.53 $ $ $ $ $ $ $ $ $ $ $ — — 3 3 — (164) (161) — (161) 398 (0.40) 778 3 775 398 (161) 559 1.03 (0.41) 1.44 1.00 (0.40) 1.40 Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate Effective tax rate (See Note 16) Impact on effective tax rate as a result of Special Items(d)(e) Adjusted effective tax rate 25.9% 1.0% 24.9% 22.6% (3.9)% 26.5% 47.2% 20.3% 26.9% F o r m 1 0 - K (a) During the years ended December 31, 2019 and 2018, we recorded impairment charges of $11 million and $12 million, respectively, on intangible assets and goodwill attributable to the Daojia business. The amount was included in Closures and impairment expenses in our Consolidated Statements of Income, but was not allocated to any segment for performance reporting purposes. For the years ended December 31, 2019 and 2018, we recorded tax benefits of $1 million and $3 million, respectively, associated with the Daojia impairment, and allocated $2 million and $1 million of the after-tax impairment charges to noncontrolling interests, respectively. (See Note 5) (b) As a result of the acquisition of Wuxi KFC in the first quarter of 2018, the Company recognized a gain of $98 million from the re-measurement of our previously held 47% equity interest at fair value, which was not allo- cated to any segment for performance reporting purposes. (See Note 5) (c) During the year ended December 31, 2017, we recognized income from the reversal of contingent consideration previously recorded for a business combination as the likelihood of making payment became remote. YUM CHINA – 2019 Form 10-K 61 PART II (d) (e) Tax effect was determined based upon the nature, as well as the jurisdiction, of each Special Item at applicable tax rate. The Company incurred an estimated one-time income tax charge of $164 million in the fourth quarter of 2017, as a result of the Tax Act, due to the transition tax on deemed repatriation of accumulated undistributed earnings of foreign subsidiaries, and additional tax related to the revaluation of certain deferred tax assets. In the fourth quarter of 2018, we recognized a tax benefit of $36 million as a result of adjusting the provisional amount of the transition tax previously recorded. We completed the evaluation of the impact on our transition tax computation based on the final regulations that were released by the U.S. Treasury Department and the IRS and became effective in the first quarter of 2019, and recorded an additional tax expense of $8 million for the transition tax accordingly in the first quarter of 2019. Adjusted EBITDA Net income, along with the reconciliation to Adjusted EBITDA, is presented below. 2019 2018 2017 $ 713 $ 30 260 (39) (63) 901 11 912 428 38 708 $ 28 214 (36) 27 941 (86) 855 445 40 398 26 379 (25) — 778 (3) 775 409 58 $ 1,378 $ 1,340 $ 1,242 Reconciliation of Net Income to Adjusted EBITDA Net Income—Yum China Holdings, Inc. Net income—noncontrolling interests Income tax provision Interest income, net Investment (gain) loss Operating Profit Special Items, Operating Profit Adjusted Operating Profit Depreciation and amortization Store impairment charges Adjusted EBITDA K - 0 1 m r o F 62 YUM CHINA – 2019 Form 10-K Segment Results KFC KFC delivered strong sales performance in 2019, marking the fourth year of positive same-store sales growth, led by continued focus on innovative products, creating abundant value to our customers as well as upgrading ingredients to meet Chinese consumers’ needs. KFC also continued with its digital and delivery initiatives to enhance customer experi- ence. KFC loyalty program members exceeded 215 million at year-end 2019 and contributed 57% of system sales at KFC in the fourth quarter of 2019. Delivery sales accounted for 19% of Company sales at KFC in 2019 with store and city coverage of 78% and 95%, respectively, at the end of 2019. 2019 2018 2017 Reported Ex F/X Reported Ex F/X % B/(W) 2019 2018 Company sales Franchise fees and income Revenues from transactions with franchisees and unconsolidated affiliates Other revenue Total revenues Restaurant profit Restaurant margin % G&A expenses Franchise expenses Expenses for transactions with franchisees and unconsolidated affiliates Closure and impairment expenses, net Other income, net Operating Profit System Sales Growth System Sales Growth, excluding F/X Same-Store Sales Growth $ 5,839 136 $ 5,495 132 $ 4,863 134 64 1 $ 61 — $ 69 — $ $ 6,040 $ 5,688 $ 5,066 $ 1,042 $ 984 $ 877 6 2 6 NM 6 6 11 7 10 NM 11 11 13 (1) (12) NM 12 12 17.8% 17.9% 18.0% (0.1) ppts. 207 69 176 69 193 69 (7) — $ $ $ $ (0.1) ppts. (12) (5) (0.1) ppts. (10) (2) $ 64 $ 9 (56) $ $ 949 $ 60 10 $ (50) $ $ 895 70 20 (57) 802 (5) 15 10 6 (8) 13 15 11 11 48 (11) 11 $ $ $ $ $ $ 10 (3) (13) NM 10 9 (0.1) ppts. (8) 4 12 49 (13) 8 2019 2018 6% 11% 4% 10% 7% 2% % Increase Unit Count 2019 2018 2017 2019 2018 Company-owned Unconsolidated affiliates Franchisees Company-owned Unconsolidated affiliates Franchisees Total 5,083 896 555 6,534 4,597 811 502 5,910 4,112 891 485 5,488 11 10 11 11 12 (9) 4 8 2018 New Builds Closures Refranchised 2019 4,597 811 502 5,910 586 106 50 742 (83) (21) (14) (118) (17) — 17 — 5,083 896 555 6,534 YUM CHINA – 2019 Form 10-K 63 F o r m 1 0 - K PART II Company-owned Unconsolidated affiliates Franchisees Total 2017 New Builds Acquired(a) Closures Refranchised 2018 4,112 891 485 5,488 443 98 25 566 159 (157) (2) — (108) (21) (15) (144) (9) — 9 — 4,597 811 502 5,910 (a) As a result of acquisition of Wuxi KFC as disclosed in Note 1, the units of Wuxi KFC have been transferred from unconsolidated affiliates to Company-owned. Company Sales and Restaurant Profit The changes in Company sales and Restaurant profit were as follows: Income (Expense) Company sales Cost of sales Cost of labor Occupancy and other operating expenses Restaurant profit Income (Expense) Company sales Cost of sales Cost of labor Occupancy and other operating expenses Restaurant profit 2019 vs. 2018 2018 Store Portfolio Actions Other F/X 5,495 $ (1,679) (1,167) (1,665) 984 $ 414 $ (136) (89) (125) 64 $ 194 $ (102) (45) (5) 42 $ (264) $ 82 56 78 (48) $ 2018 vs. 2017 2017 Store Portfolio Actions Other F/X 4,863 $ (1,455) (1,013) (1,518) 877 $ 395 $ (130) (91) (118) 56 $ 114 $ (58) (40) 8 24 $ 123 $ (36) (23) (37) 27 $ $ $ $ $ 2019 5,839 (1,835) (1,245) (1,717) 1,042 2018 5,495 (1,679) (1,167) (1,665) 984 K - 0 1 m r o F In 2019, the increase in Company sales and Restaurant profit, excluding the impact of F/X, was mainly driven by same- store sales growth, net unit growth, labor efficiency, a decrease in utilities expenses and other restaurant operating costs, partially offset by commodity inflation of 4%, wage inflation of 5% and higher promotion cost. In 2018, the increase in Company sales and Restaurant profit, excluding the impact of F/X, was driven by net unit growth including the acquisition of Wuxi KFC, same-store sales growth, labor efficiency, and a decrease in advertising expenses, partially offset by wage inflation of 6%, higher promotion cost and commodity inflation of 2%. Franchise Fees and Income In 2019, the increase in Franchise fees and income, excluding the impact of F/X, was primarily driven by same-store sales growth and net unit growth for the unconsolidated affiliates and franchisees, partially offset by the impact from the acquisition of Wuxi KFC in 2018. In 2018, the decrease in Franchise fees and income, excluding the impact of F/X, was primarily driven by the acquisition of Wuxi KFC, partially offset by net unit growth and same-store sales growth for the unconsolidated affiliates and fran- chisees. 64 YUM CHINA – 2019 Form 10-K G&A Expenses In 2019, the increase in G&A expenses, excluding the impact of F/X, was primarily driven by higher compensation costs mainly due to merit increases and higher performance-based compensation associated with strong operating results of KFC. In 2018, the increase in G&A expenses, excluding the impact of F/X, was driven by higher compensation cost mainly due to merit increases. Operating Profit In both 2019 and 2018, the increase in Operating profit, excluding the impact of F/X, was primarily driven by the increase in Restaurant profit, partially offset by higher G&A expenses. Pizza Hut During 2019, we continued to make progress with the Pizza Hut revitalization program. The revitalization strategy of Pizza Hut focuses on fixing the fundamentals, including investments in product upgrades and enhancing digital capabil- ities through expanding the user base while strengthening delivery core capabilities and enhancing asset portfolio to drive growth. Pizza Hut loyalty program members exceeded 70 million at year-end 2019 and contributed 51% of system sales at Pizza Hut in the fourth quarter of 2019. Delivery sales accounted for 26% of Company sales at Pizza Hut in 2019 with store and city coverage of 91% and 97%, respectively, at the end of 2019. Company sales Franchise fees and income Revenues from transactions with franchisees and unconsolidated affiliates Other revenue Total revenues 2019 2018 2017 Reported Ex F/X Reported Ex F/X $ 2,045 4 $ 2,106 3 $ 2,090 2 4 1 $ 2 — $ 1 — $ $ 2,054 $ 2,111 $ 2,093 (3) 71 NM NM (3) 2 79 NM NM 2 1 18 12 NM 1 (2) 16 11 NM (2) % B/(W) 2019 2018 Restaurant profit Restaurant margin % G&A expenses Franchise expenses Expenses for transactions with franchisees and unconsolidated affiliates Closure and impairment expenses, net Other income, net Operating Profit $ $ $ $ $ $ $ System Sales (Decline) Growth System Sales Growth (Decline), excluding F/X Same-Store Sales Growth (Decline) $ $ 292 215 227 11.1% 10.3% 13.9% 0.8 ppts. 101 2 102 2 108 2 1 (32) $ $ $ $ 5 $ 4 $ 14 — $ $ 114 $ 2 $ 19 (2) $ $ 97 1 27 — 157 NM 27 NM 17 10 0.8 ppts. (26) (3.6) ppts. (29) (3.6) ppts. (4) (38) NM 24 NM 22 5 (22) (10) 31 NM (38) 8 (19) (9) 32 NM (41) 2019 2018 (2)% 3% 1% 1% (1)% (5)% % Increase Unit Count Company-owned Franchisees 2019 2018 2017 2019 2018 2,178 103 2,281 2,188 52 2,240 2,166 29 2,195 — 98 2 1 79 2 YUM CHINA – 2019 Form 10-K 65 F o r m 1 0 - K PART II Company-owned Franchisees Total Company-owned Franchisees Total 2018 New Builds Closures Refranchised 2019 2,188 52 2,240 117 15 132 (90) (1) (91) (37) 37 — 2,178 103 2,281 2017 New Builds Closures Refranchised 2018 2,166 29 2,195 140 17 157 (110) (2) (112) (8) 8 — 2,188 52 2,240 Company Sales and Restaurant Profit The changes in Company sales and Restaurant profit were as follows: Income (Expense) Company sales Cost of sales Cost of labor Occupancy and other operating expenses Restaurant profit Income (Expense) Company sales Cost of sales Cost of labor Occupancy and other operating expenses Restaurant profit 2018 Store Portfolio Actions Other F/X 2019 2019 vs. 2018 $ $ $ $ 2,106 $ (637) (538) (716) 215 $ 9 $ (4) (1) 5 9 $ 22 $ (21) (35) 46 12 $ 2018 vs. 2017 (92) $ 29 25 29 (9) $ 2,045 (633) (549) (636) 227 2017 Store Portfolio Actions Other F/X 2018 2,090 $ (566) (519) (713) 292 $ 60 $ (21) (14) (17) 8 $ (93) $ (37) 8 30 (92) $ 49 $ (13) (13) (16) 7 $ 2,106 (637) (538) (716) 215 In 2019, the increase in Company sales and Restaurant profit, excluding the impact of F/X, was primarily driven by same-store sales growth, store portfolio actions, labor efficiency, commodity deflation of 2%, and savings in utilities and other restaurant operating costs, partially offset by higher promotion costs and wage inflation of 5%. K - 0 1 m r o F In 2018, the decrease in Company sales, excluding the impact of F/X, was primarily driven by same-store sales decline, partially offset by net unit growth. The decrease in Restaurant profit, excluding the impact of F/X, was primarily driven by higher promotion and product upgrade costs, wage inflation of 6% and same-store sales decline, partially offset by labor efficiency and net unit growth. G&A Expenses In 2019, the increase in G&A expenses, excluding the impact of F/X, was primarily driven by higher compensation costs due to higher performance-based compensation and merit increases, and lower government incentives received, partially offset by lower shared cost allocation associated with store development activities. In 2018, the decrease in G&A expenses, excluding the impact of F/X, was primarily driven by higher government incen- tives received and lower performance-based compensation, partially offset by higher compensation costs due to merit increases. 66 YUM CHINA – 2019 Form 10-K Operating Profit In 2019, the increase in Operating profit, excluding the impact of F/X, was primarily driven by the increase in Restaurant profit and lower closure and store impairment expenses, partially offset by higher G&A expenses. In 2018, the decrease in Operating profit, excluding the impact of F/X, was primarily driven by the decrease in Restau- rant profit, partially offset by lower closure and impairment expenses primarily due to lapping the impact of the Pizza Hut business integration during 2017, and lower G&A expenses. All Other Segments All Other Segments reflects the results of Little Sheep, COFFii & JOY, East Dawning, Taco Bell, Daojia and our e-commerce business. 2019 2018 2017 Reported Ex F/X Reported Ex F/X % B/(W) 2019 2018 Company sales Franchise fees and income Revenues from transactions with franchisees and unconsolidated affiliates Other revenues Total revenues Restaurant (loss) profit Restaurant margin % G&A expenses Expenses for transactions with franchisees and unconsolidated affiliates Other operating costs and expenses Closure and impairment expenses, net Other (income) loss, net Operating Loss Company Sales $ $ $ $ $ $ 41 8 28 81 32 6 26 51 40 5 25 36 158 $ 115 $ 106 27 22 8 59 37 (3) $ — $ 2 NM (7.3)% (2.8)% 34 $ 33 $ 2.9% (4.5) ppts. 26 (1) $ $ 21 43 23 $ 69 $ $ 2 $ — $ $ (14) $ 21 $ $ 28 $ — $ — 2 (9) (2) (12) $ $ (12) (62) NM NM (13) 32 27 12 63 41 NM (4.5) ppts. (4) (15) (66) NM NM (17) (18) 41 4 41 10 NM (5.7) (28) 5 (51) 98 NM (9) (20) 39 1 41 8 ppts. NM (5.7) ppts. (26) 6 (54) 99 NM (16) In 2019, the increase in Company sales, excluding the impact of F/X, was primarily driven by higher sales generated from our e-commerce business and the launch of the COFFii & JOY concept. In 2018, the decreases in Company sales, excluding the impact of F/X, were primarily driven by unit closures and refran- chising of Little Sheep units. F o r m 1 0 - K Other Revenue and Other Operating Costs and Expenses In both 2019 and 2018, the increase in Other revenue and Other operating costs and expenses, excluding the impact of F/X, was primarily driven by inter-segment revenue transactions generated from our e-commerce business and Daojia. G&A Expenses In 2019, G&A expenses increased mainly due to an increase of G&A expenses incurred by Little Sheep, partially offset by a decrease of G&A expenses incurred by Daojia. In 2018, G&A expenses increased mainly due to G&A expenses incurred by Daojia. YUM CHINA – 2019 Form 10-K 67 PART II Operating Loss In 2019, the increase in Operating loss, excluding the impact of F/X, was primarily due to the operating loss incurred by Little Sheep and COFFii & JOY, partially offset by the improvement in operating results of our other operating seg- ments. In 2018, the increase in Operating loss, excluding the impact of F/X, was primarily due to an increase of operating loss of Daojia and a decrease of operating profit of Little Sheep. Corporate & Unallocated Revenues from transactions with franchisees and unconsolidated affiliates(a) Other revenues Expenses for transactions with franchisees and unconsolidated affiliates(a) Other operating costs and expenses Corporate G&A expenses Unallocated closures and impairments Other unallocated income Interest income, net Investment gain (loss) Income tax provision (See Note 16) Effective tax rate (See Note 16) 2019 2018 2017 Reported Ex F/X Reported Ex F/X % B/(W) 2019 2018 558 4 514 3 504 — 8 56 13 61 554 4 145 11 4 39 63 (260) 25.9% 22.6% 47.2% (3.3) ppts 512 2 128 12 98 36 (27) (214) 500 — 185 — 9 25 — (379) (8) (68) (13) 1 (95) 7 NM (21) (13) (75) (17) 1 (95) 12 NM (26) (3.3) ppts 2 NM (2) NM 31 NM NM 47 NM 43 1 NM (1) NM 31 NM NM 44 NM 45 24.6 ppts 24.6 ppts (a) Primarily includes revenues and associated expenses of transactions with franchisees and unconsolidated affili- ates derived from the Company’s central procurement model whereby the Company centrally purchases all food and paper products from suppliers then sells and delivers to all restaurants, including franchisees and unconsoli- dated affiliates. Amounts have not been allocated to any segment for purposes of making operating decisions or assessing financial performance as the transactions are corporate revenues and expenses in nature. Revenues from Transactions with Franchisees and Unconsolidated Affiliates K - 0 1 m r o F In 2019, the increase in Revenues from transactions with franchisees and unconsolidated affiliates, excluding the impact of F/X, was mainly driven by system sales growth of franchisees and unconsolidated affiliates and an increase in the sell- ing prices of food and paper products due to commodity inflation, partially offset by the impact from the acquisition of Wuxi KFC. In 2018, the increase in Revenues from transactions with franchisees and unconsolidated affiliates, excluding the impact of F/X, was mainly driven by system sales growth of franchisees and unconsolidated affiliates, partially offset by the impact from the acquisition of Wuxi KFC. Corporate G&A Expenses In 2019, the increase in Corporate G&A expenses, excluding the impact of F/X, was mainly driven by higher compensation costs and lower government incentives received. In 2018, the decrease in Corporate G&A expenses, excluding the impact of F/X, was driven by higher gov- ernment incentives received, lower performance-based compensations and lower professional service fees. Unallocated Closures and Impairments In 2019 and 2018, Unallocated closures and impairments represent the impairment charges of $11 million and $12 million on goodwill and intangible assets acquired from Daojia, respectively. See Note 5. 68 YUM CHINA – 2019 Form 10-K Other Unallocated Income Income Tax Provision In 2019, Other unallocated income primarily includes refranchising gain. In 2018, Other unallocated income primarily includes a gain of $98 million recognized from the re-measurement of our previously held equity interest in Wuxi KFC at fair value upon acquisition. See Note 5. Interest Income, Net The increases in interest income, net for both 2019 and 2018 were driven by higher returns on larger balances of short-term investments and cash equivalents which mainly include time deposits. Investment Gain (Loss) The investment gain or loss represents the unrealized gain or loss related to investment in equity securities of Mei- tuan Dianping (“Meituan”). See Note 5. Our income tax provision includes tax on our earnings at the Chinese statutory tax rate of 25%, withholding tax on repatriation of earnings outside of China, and U.S. corpo- rate income tax, if any. Our effective tax rate was 25.9%, 22.6% and 47.2% in 2019, 2018 and 2017, respectively. The change in effective tax rate is primarily due to the impact from the Tax Act as well as non-taxable gain or loss related to our investment in equity securities of Mei- tuan. The higher effective tax rate in 2019 compared with that in 2018 was due to an additional tax expense of $8 million on transition tax pursuant to the Tax Act recorded in the first quarter of 2019, offset by non-taxable gain of $63 million related to our investment in equity securities of Meituan. The effective tax rate was lower in 2018 but higher in 2017 due to the tax benefit of $36 million recorded in 2018 reducing the provisional amount of the transition tax of $164 million recorded in 2017 pursuant to the Tax Act. Significant Known Events, Trends or Uncertainties Expected to Impact Future Results Novel Coronavirus Outbreak Our business could be materially and adversely affected by the outbreak of a widespread health epidemic, such as coronavirus, avian flu, or African swine flu. Starting January 2020, the novel coronavirus outbreak originating in Wuhan, China has significantly impacted the Compa- ny’s operations, including the temporary closure of more than 30% of its restaurants in China during the Chinese New Year holiday, and a significant decline in sales for restaurants that remained open, which is likely to have a materially adverse impact on the Company’s results of operations, cash flows and financial condition for the first quarter of 2020 and full year 2020. At this time, the Com- pany cannot forecast when (and at what rate) the closed restaurants will re-open, which is subject to the local gov- ernments’ requirements, and when restaurant guest traffic will be restored (and at what level). The extent to which our operations continue to be impacted by the outbreak will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concern- ing the severity of the outbreak and the actions by the government authorities to contain the outbreak or treat its impact, among other things. Insurance may be unavail- able to cover any losses we incur as a result of the out- break. F o r m 1 0 - K Tax Examination on Transfer Pricing We are subject to reviews, examinations and audits by Chinese tax authorities, the IRS and other taxing author- ities with respect to income and non-income based taxes. Since 2016, we have been under a national audit on trans- fer pricing by the STA in China regarding our related party transactions for the period from 2006 to 2015. The information currently exchanged with tax authorities focuses on our franchise arrangement with YUM. We YUM CHINA – 2019 Form 10-K 69 PART II have submitted information to the extent it is available to the Company. It is reasonably possible that there could be significant developments, including expert review and assessment by the STA, within the next 12 months. The ultimate assessment will depend upon further review of the information provided and ongoing technical and other discussions with the STA and in-charge local tax author- ities, and therefore it is not possible to reasonably estimate the potential impact. We will continue to defend our transfer pricing position. However, if the STA prevails in the assessment of additional tax due based on its ruling, the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations and cash flows. PRC Value-Added Tax Effective May 1, 2016, a 6% output VAT replaced the 5% business tax (“BT”) previously applied to certain restau- rant sales. Input VAT would be creditable to the afore- mentioned 6% output VAT. 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, mainly including construction, transpor- tation and leasing. However, the impact on our operating results is not expected to be significant. Entities that are VAT general taxpayers are permitted to offset qualified input VAT paid to suppliers against their output VAT upon receipt of appropriate supplier VAT invoices on an entity-by-entity basis. When the output VAT exceeds the input VAT, the difference is remitted to tax authorities, usually on a monthly basis; whereas when the input VAT exceeds the output VAT, the difference is treated as an input VAT credit asset which can be carried forward indefinitely to offset future net VAT payables. VAT related to purchases and sales which have not been settled at the balance sheet date is disclosed separately as an asset and liability, respectively, on the Consolidated Balance Sheets. At each balance sheet date, the Company reviews the outstanding balance of any input VAT credit K - 0 1 m r o F 70 YUM CHINA – 2019 Form 10-K asset for recoverability, giving consideration to the indef- inite life of the input VAT credit assets as well as its fore- casted operating results and capital spending, which inherently includes significant assumptions that are sub- ject to change. As of December 31, 2019, an input VAT credit asset of $243 million and payable of $5 million were recorded in Other assets and Accounts payable and other current liabilities, respectively, on the Consolidated Balance Sheets. The Company has not made an allowance for the recoverability of the input VAT credit asset, as the bal- ance is expected to be utilized to offset against VAT pay- ables more than one year from December 31, 2019. Any input VAT credit asset would be classified as Prepaid expenses and other current assets if the Company expected to use the credit within one year. We have been benefiting from the retail tax structure reform since it was implemented on May 1, 2016. How- ever, the amount of our expected benefit from this VAT regime depends on a number of factors, some of which are outside of our control. The interpretation and applica- tion of the new VAT regime are not settled at some local governmental levels. In addition, the timetable for enact- ing the prevailing VAT regulations into national VAT law, including ultimate enacted VAT rates, is not clear. As a result, for the foreseeable future, the benefit of this sig- nificant and complex VAT reform has the potential to fluctuate from quarter to quarter. Foreign Currency Exchange Rate The reporting currency of the Company is the US$. Most of the revenues, costs, assets and liabilities of the Com- pany are denominated in RMB. Any significant change in the exchange rate between US$ and RMB may materially affect the Company’s business, results of operations, cash flows and financial condition, depending on the weaken- ing or strengthening of RMB against the US$. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for a further discussion. Consolidated Cash Flows Net cash provided by operating activities was $1,185 million in 2019 as compared to $1,333 million in 2018. The decrease was primarily driven by timing of payments for inventory along with other working capital changes. In 2018, net cash provided by operating activities was $1,333 million as compared to $884 million in 2017. The increase was primarily driven by higher Operating Profit and timing of payments for inventory. Net cash used in investing activities was $910 million in 2019 as compared to $552 million in 2018. The increase was primarily driven by the net impact on cash flow resulting from purchases and maturities of short-term investments, partially offset by lapping the impact from the acquisition of Wuxi KFC and investment in Meituan’s ordinary shares in 2018. Liquidity and Capital Resources Historically we have funded our operations through cash generated from the operation of our Company-owned stores and from our franchise operations and dividend payments from our unconsolidated affiliates. Our ability to fund our future operations and capital needs will depend on our ongoing ability to generate cash from operations. We believe our principal uses of cash in the future will be primarily to fund our operations and to make capital expenditures, distributions to our stockhold- ers and share repurchases as well as any acquisition or investment we may make. We believe that our future cash from operations, together with our access to funds on hand and capital markets, will provide adequate resources to fund these uses of cash and that our existing cash, net cash from operations and credit facilities will be sufficient to fund our operations and anticipated capital expendi- tures for the next 12 months. If our cash flows from operations are less than we require, we may need to access the capital markets to obtain financing. Our access to, and the availability of, financing on acceptable terms and conditions in the future or at all In 2018, net cash used in investing activities was $552 million as compared to $557 million in 2017. The decrease was primarily driven by the net impact on cash flow resulting from purchases and maturities of short- term investments, partially offset by the acquisition of Wuxi KFC, investment in Meituan’s ordinary shares and higher capital spending. Net cash used in financing activities was $480 million in 2019 as compared to $518 million in 2018. The decrease was primarily driven by a decrease in the number of shares repurchased, partially offset by an increase in cash dividends paid to stockholders. In 2018, Net cash used in financing activities was $518 million as compared to $185 million in 2017. The increase was mainly driven by an increase in the number of shares repurchased and cash dividends paid to stock- holders in 2018. F o r m 1 0 - K will be impacted by many factors, including, but not lim- ited to: • our financial performance; • our credit ratings; • the liquidity of the overall capital markets; and • the state of the Chinese, U.S. and global economies as well as relations between the Chinese and U.S. govern- ments. There can be no assurance that we will have access to the capital markets on terms acceptable to us or at all. Generally, our income is subject to the Chinese statutory tax rate of 25%. However, to the extent our cash flows from operations exceed our China cash requirements, the excess cash may be subject to an additional 10% with- holding tax levied by the Chinese tax authority, subject to any reduction or exemption set forth in relevant tax trea- ties or tax arrangements. YUM CHINA – 2019 Form 10-K 71 PART II Dividends and Share Repurchases Our Board of Directors has authorized an aggregate of $1.4 billion for our share repurchase program. Yum China may repurchase shares under this program from time to time in open market or privately negotiated transactions, including block trades, accelerated share repurchase transactions and the use of Rule 10b5-1 trading plans. During the years ended December 31, 2019, 2018 and 2017, the Company repurchased $261 million or 6.2 million, $312 million or 9.0 million, and $128 million or 3.4 million shares of common stock, respectively, under the repurchase program. On October 4, 2017, the board of directors approved a regular quarterly cash dividend program, and declared an initial cash dividend of $0.10 per share on Yum China’s common stock. Total cash dividends of $38 million were paid to shareholders in December 2017. The Company paid a cash dividend of $0.10 per share for each of the first three quarters of 2018 and $0.12 per share for the fourth quarter of 2018 and each quarter of 2019. Total cash divi- dends of $181 million and $161 million were paid to shareholders in 2019 and 2018, respectively. On February 5, 2020, the board of directors declared a cash dividend of $0.12 per share, payable on March 25, 2020, to stockholders of record as of the close of business on March 4, 2020. Our ability to declare and pay any dividends on our stock may be restricted by earnings available for distribution under applicable Chinese laws. The laws, rules and regu- lations applicable to our Chinese subsidiaries permit pay- ments of dividends only out of their accumulated profits, if any, determined in accordance with applicable Chinese accounting standards and regulations. 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 cer- tain statutory reserve funds, until the aggregate amount of K - 0 1 m r o F 72 YUM CHINA – 2019 Form 10-K such a fund reaches 50% of its registered capital. As a result, our Chinese subsidiaries are restricted in their abil- ity 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. Borrowing Capacity As of December 31, 2019, the Company had credit facili- ties of RMB2,893 million (approximately $415 million), of comprised RMB1,500 million (approximately $215 million) in the aggregate and offshore credit facilities of $200 million in the aggregate. facilities onshore credit of The credit facilities had remaining terms ranging from less than one year to three years as of December 31, 2019. Each credit facility bears interest based on the prevailing rate stipulated by the People’s Bank of China, Loan Prime Rate (“LPR”) published by the National Interbank Fund- ing Centre of the PRC or London Interbank Offered Rate (“LIBOR”) administered by the ICE Benchmark Admin- istration. Each credit facility contains a cross-default pro- vision whereby our failure to make any payment on a principal amount from any credit facility will constitute a default on other credit facilities. Some of the credit facili- ties contain covenants limiting, among other things, cer- tain additional indebtedness and liens, and certain other transactions specified in the respective agreement. Some of the onshore credit facilities contain sub-limits for over- drafts, non-financial bonding, standby letters of credit and guarantees. As of December 31, 2019, we had outstand- ing bank guarantees of RMB 85 million (approximately $12 million) to secure our lease payments to landlords for certain Company-owned restaurants. The credit facilities were therefore reduced by the same amount, while there were no borrowings outstanding as of December 31, 2019. Contractual Obligations Our significant contractual and other long-term obligations and payments as of December 31, 2019 included: Finance Leases(a) Operating Leases(a) Purchase Obligations(b) Transition Tax(c) Total Contractual Obligations Total 39 $ 2,708 204 51 3,002 $ $ $ Less than 1 Year 1-3 Years 3-5 Years More than 5 Years 4 $ 504 58 6 572 $ 8 $ 837 73 9 927 $ 6 $ 586 27 21 640 $ 21 781 46 15 863 (a) (b) (c) These obligations, which are shown on a nominal basis, relate primarily to more than 7,300 Company-owned res- taurants. See Note 11. Purchase obligations relate primarily to supply and service agreements. We have excluded agreements that are cancelable without penalty or have a remaining term not in excess of one year. Such commitments are generally near term in nature, will be funded from operating cash flows, and are not significant to the Company’s overall financial position. This amount represents an updated transition tax payable on the deemed repatriation of accumulated undistributed foreign earnings after utilizing existing qualified foreign tax credits, which is to be paid over a maximum of eight years beginning in 2018. We have not included in the contractual obligations table approximately $24 million of liabilities for unrecognized tax benefits related to the uncertainty with regard to the deductibility of certain business expenses incurred as well as related accrued interest and penalties. These liabilities may increase or decrease over time as a result of tax examinations, and given the status of the examinations, we cannot reliably estimate the period of any cash settle- ment with the respective taxing authorities. These liabil- ities exclude amounts that are temporary in nature and for which we anticipate that over time there will be no net cash outflow. Off-Balance Sheet Arrangements See the Guarantees for Franchisees and Unconsolidated Affiliates sections of Note 18 for discussion of our off-balance sheet arrangements. F o r m 1 0 - K New Accounting Pronouncements Recently Adopted Accounting Pronouncements See Note 2 for details of recently adopted accounting pro- nouncements. New Accounting Pronouncements Not Yet Adopted In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial (“ASU Instruments 2016-13”), which requires measurement and recognition of expected versus incurred credit losses for financial assets held. The FASB subsequently issued amendments to clarify the implementation guidance. We will adopt these standards in the first quarter of fiscal 2020. The adoption of this standard will result in a change of our provision policy primarily for accounts receivable, but we do not expect the adoption of this standard to have a mate- rial impact on our financial statements. YUM CHINA – 2019 Form 10-K 73 PART II In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework –changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amended the fair value measurement guidance by modifying disclosure requirements. We will adopt the standard in the first quar- ter of 2020, and do not expect the adoption of this standard to have a material impact on our financial statements. for under ASC 606 when the counterparty is a customer for a distinct good or service. The amendment also pre- cludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue if the counterparty is not a customer for that transaction. We will adopt the standard in the first quarter of 2020, and do not expect the adoption of this standard to have a material impact on our financial statements. In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other-Internal-Use Soft- ware: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with those for an internal-use software license. We will adopt this standard in the first quarter of fiscal 2020, and do not expect the adoption of this standard to have a material impact on our financial statements. In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808), Clarifying the Interaction between Topic 808 and Topic 606 (ASU 2018-18) (“ASU 2018-18”), which clarifies that transac- tions in a collaborative arrangement should be accounted In December 2019, the FASB issued ASU 2019-12, Income Tax (Topic 740), Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis dif- ferences. The guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for the Company from January 1, 2021, with early adoption permitted. We are currently evaluating the impact the adoption of this standard will have on our financial statements. K - 0 1 m r o F Critical Accounting Policies and Estimates Our reported results are impacted by the application of certain accounting policies that require us to make sub- jective or complex judgments. These judgments involve estimations of the effect of matters that are inherently uncertain and may significantly impact our quarterly or annual results of operations or financial condition. Changes in the estimates and judgments could signifi- cantly affect our results of operations, financial condition and cash flows in future years. A description of what we consider to be our most significant critical accounting policies follows. Loyalty Programs Each of the Company’s KFC and Pizza Hut reportable segments operates a loyalty program that allows regis- tered members to earn points for each qualifying pur- chase. Points, which generally expire 18 months after being earned, may be redeemed for future purchases of KFC or Pizza Hut branded products or other products for free or at a discounted price. Points cannot be redeemed or exchanged for cash. The estimated value of points earned by the loyalty program members is recorded as a reduc- tion of revenue at the time the points are earned, based on the percentage of points that are projected to be redeemed, with a corresponding deferred revenue liability included in Accounts payable and other current liabilities on the Consolidated Balance Sheets and subsequently recog- nized into revenue when the points are redeemed or expire. The Company estimates the value of the future redemption obligations based on the estimated value of the product for which points are expected to be redeemed and historical redemption patterns and reviews its esti- mates periodically based upon the latest available infor- mation regarding redemption and expiration patterns. 74 YUM CHINA – 2019 Form 10-K Breakage Revenue We recognize revenues from prepaid stored-value prod- ucts, including gift cards and product vouchers, when they are redeemed by the customer. Prepaid gift cards sold at any given point generally expire over the next 36 months, and product vouchers generally expire over a period of up to 12 months. We recognize breakage revenue, which is the amount of prepaid stored-value products that is not expected to be redeemed, either (1) proportionally in earnings as redemptions occur, in situations where the Company expects to be entitled to a breakage amount, or (2) when the likelihood of redemption is remote, in situa- tions where the Company does not expect to be entitled to breakage, provided that there is no requirement for remit- ting balances to government agencies under unclaimed property laws. The Company reviews its breakage esti- mates at least annually based upon the latest available information regarding redemption and expiration pat- terns. Impairment or Disposal of Long-Lived Assets We review long-lived assets of restaurants (primarily operating lease right-of-use assets and property, plant and equipment (“PP&E”)) semi-annually for impairment, or whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recov- erable. We evaluate recoverability based on the restau- rant’s forecasted undiscounted cash flows, which are based on our entity-specific assumptions, to the carrying value of such assets. The forecasted undiscounted cash flows incorporate our best estimate of sales growth based upon our operation plans for the unit and actual results at comparable restaurants. For restaurant assets that are to be recoverable, we write down the deemed not impaired restaurant to its estimated fair value. In deter- mining the fair value of restaurant-level assets, we con- sider the highest and best use of the assets from market participants’ perspective, which is represented by the higher of the forecasted discounted cash flows of operat- ing restaurants and the price market participants would pay to sub-lease the operating lease right-of-use assets and acquire remaining restaurant assets, even if that use differs from the current use by the Company. Key assumptions in the determination of fair value include reasonable sales growth assumption in generating after-tax cashflows that would be used by a franchisee in the determination of a purchase price for the restaurant, and market rental assumption for estimating the price market participants would pay to sub-lease the operating lease right-of-use assets. Estimates of forecasted cash flows of operating restaurants are highly subjective judgments and can be significantly impacted by changes in the business or eco- nomic conditions. Estimates of the price market partici- pants would pay to sub-lease the operating lease right-of-use assets are based on comparable market rental information that could be reasonably obtained for the property. In situations where the highest and best use of the restaurant level assets from market participants’ per- spective is represented by sub-leasing the operating lease right-of-use assets and acquiring the remaining restaurant assets, the Company continues to use these assets in oper- ating its restaurant business, which is consistent with its long-term strategy of growing revenue through operating restaurant concepts. When we believe it is more likely than not a restaurant or groups of restaurants will be refranchised for a price less than their carrying value, but do not believe the restaurant(s) have met the criteria to be classified as held for sale, we review the restaurants for impairment. Expected net sales proceeds are generally based on actual bids from the buyer. The discount rate used in the fair value calculations is our estimate of the required rate-of-return that a franchisee would expect to receive when purchasing a similar res- taurant or groups of restaurants and the related long-lived assets. The discount rate incorporates rates of returns for historical refranchising market transactions and is com- mensurate with the risks and uncertainty inherent in the forecasted cash flows. F o r m 1 0 - K We evaluate indefinite-lived intangible assets for impair- ment on an annual basis or more often if an event occurs or circumstances change that indicates impairment might exist. We perform our annual test for impairment of our indefinite-lived intangible assets at the beginning of our fourth quarter. When we evaluate these assets for impair- ment, we have the option to first perform a qualitative assessment to determine whether an intangible asset group is impaired. If we believe, as a result of the qualita- tive assessment, that it is more likely than not that the fair YUM CHINA – 2019 Form 10-K 75 PART II value of the intangible asset group is less than its carrying amount, we will then perform quantitative assessment. Fair value is an estimate of the price a willing buyer would pay for the intangible asset and is generally estimated by discounting the expected future after-tax cash flows asso- ciated with the intangible asset. We only have one mate- rial indefinite-lived intangible asset, which is our Little Sheep trademark. The Little Sheep trademark had a book value of $52 million and $53 million at December 31, 2019 and 2018, respectively. In the years ended December 31, 2019, 2018 and 2017, we elected to perform the qualitative impairment assess- ment for the Little Sheep trademark by evaluating all per- tinent factors, including but not limited to macroeconomic conditions, industry and market conditions and financial performance and concluded that it was more likely than not that the asset was not impaired. Our finite-lived intangible assets that are not allocated to an individual restaurant are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable. An intangible asset that is deemed not recov- erable on a undiscounted basis is written down to its esti- mated fair value, which is our estimate of the price a willing buyer would pay for the intangible asset based on discounted expected future after-tax cash flows. For pur- poses of our impairment analysis, we update the cash flows that were initially used to value the finite-lived intangible asset to reflect our current estimates and assumptions over the asset’s future remaining life. In 2019 and 2018, we recorded impairment charges of $2 million and $12 million on finite-lived intangible assets of the Daojia business, respectively, primarily attributable to the platforms of the Daojia business. The fair value of platforms was determined using a relief-from-royalty val- uation approach that was based on unobservable inputs, including estimated future sales, royalty rates as well as the selection of an appropriate discount rate based on weighted-average cost of capital and company-specific risk premium, which are considered Level 3 inputs. K - 0 1 m r o F 76 YUM CHINA – 2019 Form 10-K Impairment of Goodwill We evaluate goodwill for impairment on an annual basis as of the beginning of our fourth quarter or more often if an event occurs or circumstances change that indicates impairment might exist. When we evaluate goodwill for impairment, we have the option to first perform a qualita- tive assessment to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount. If we believe, as a result of the qualitative assess- ment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we will then perform quantitative assessment. Our reporting units are our individual operating segments. Fair value is the price a willing buyer would pay for the reporting unit, and is generally estimated using discounted expected future after-tax cash flows from the business operation of the reporting unit. Future cash flow estimates and the discount rate are the key assumptions when estimating the fair value of a reporting unit. Future cash flows are based on growth expectations relative to recent historical performance and incorporate sales growth and margin improvement assumptions that we believe a third-party buyer would assume when determining a purchase price for the report- ing unit. The sales growth and margin improvement assumptions that factor into the discounted cash flows are highly correlated as cash flow growth can be achieved through various interrelated strategies such as product pricing and restaurant productivity initiatives. The dis- count rate is our estimate of the required rate-of-return that a third-party buyer would expect to receive when purchasing a business from us that constitutes a reporting unit. We believe the discount rate is commensurate with the risks and uncertainty inherent in the forecasted cash flows. Our goodwill of $254 million as of December 31, 2019 was related to the KFC and Pizza Hut reporting units. As a result of our annual goodwill impairment review as of the beginning of our fourth quarter of 2019, goodwill related to the Daojia reporting unit was fully impaired, resulting in an impairment charge of $9 million. The fair value of the Daojia reporting unit was based on the estimated price a willing buyer would pay, and was determined using an income approach with future cash flow estimates sup- ported by estimated future sales, margin, as well as the selection of an appropriate discount rate based on weighted-average cost of capital and company-specific risk premium. We performed a qualitative impairment assessment for each of our individual reporting units of KFC and Pizza Hut in 2019 and their fair values were substantially in excess of their respective carrying values as of the annual assessment date in 2019, and no changes in events or circumstances have occurred that indicate impairment may exist. No impairment charge on good- will was recorded in 2018 and 2017. If we record goodwill upon acquisition of a restaurant(s) from a franchisee and such restaurant(s) is then sold within two years of acquisition, the goodwill associated with the acquired restaurant(s) is written off in its entirety. If the restaurant is refranchised two years or more subse- quent to its acquisition, we include goodwill in the carry- ing amount of the restaurants disposed of based on the relative fair values of the portion of the reporting unit dis- posed of in the refranchising and the portion of the report- ing unit that will be retained. Share-Based Compensation 718 We account for share awards issued to employees in accordance with Accounting Standards Codification (“ASC 718”), Compensation-Stock Topic Compensation. Share-based compensation cost is mea- sured at the grant date based on the fair value of the award and is recognized as an expense, net of estimated forfei- tures, over the requisite service period, which is generally the vesting period. We recognize share-based compensa- tion expense for awards granted to employees and non-employee directors using the straight-line method. We estimated the fair value of stock options and stock appreciation rights (“SARs”) at the grant date using the Black-Scholes option-pricing model. It should be noted that the option-pricing model requires the input of highly subjective assumptions. Changes in the subjective input assumptions can materially affect the fair value estimate and, as a result, our operating profit and net income. Per- formance share units (“PSUs”) have market-based condi- tions that are based on Yum China’s total shareholder return performance relative to peer group in the MSCI International China Index, measured over a three-year period. The fair values of PSUs have been valued based on the outcome of a Monte-Carlo Simulation model (the “MCS model”). The total amount of fair value for the PSUs is not material to the Company’s financial state- ments. Under the Black-Scholes option-pricing model, we made a number of assumptions regarding the fair value of the share-based awards, including: • the expected future volatility of the price of shares of Yum China common stock; • the risk-free interest rate; • the expected dividend yield; and • the expected term. We estimated the expected future volatility of the price of shares of Yum China common stock based on the histori- cal price volatility of the publicly traded shares of com- mon stock of comparable companies. The risk-free interest rate was based on the U.S. Treasury zero-coupon yield in effect with maturity terms equal to the expected term of the awards. The dividend yield was estimated based on the Company’s dividend policy. We use histori- cal turnover data to estimate the expected forfeiture rate. PRC Value-Added Tax As of December 31, 2019, an input VAT credit asset of $243 million and payable of $5 million were recorded in Other assets and Accounts payable and other current liabilities, respectively, on the Consolidated Balance Sheets. At each balance sheet date, the Company reviews the outstanding balance of any VAT credit asset for recoverability, giving consideration to the indefinite life of the input VAT credit assets as well as its forecasted operating results and capital spending, which inherently include significant assumptions subject to change. Key assumptions include the following: • Estimated growth rate for revenues; • Estimated restaurant expenses and other costs; • Estimated new-unit development and asset upgrades. YUM CHINA – 2019 Form 10-K 77 F o r m 1 0 - K PART II We also consider qualitative factors including the fact that such assets can be carried forward indefinitely to offset future VAT payables, our ability to manage the accumu- lation of the input VAT credits and potential changes in VAT rates. We did not make an allowance for the recov- erability of the input VAT credit asset as of December 31, 2019 and 2018. Changes in any of the assumptions could materially impact the amount of VAT asset and its recov- erability and, as a result, our operating income and net income. Income Taxes The Tax Act K - 0 1 m r o F On December 22, 2017, the Tax Act was signed into law effective for tax years beginning after December 31, 2017. The Tax Act requires complex computations with significant estimates to be performed, significant judg- ments to be made in interpretation of the provisions, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, the SEC and other standard-setting bodies could interpret or issue guidance on how provi- sions of the Tax Act will be applied or otherwise adminis- tered that is different from our current interpretation. We completed our analysis of the Tax Act in the fourth quar- ter of 2018 according to guidance released by the U.S. Treasury Department and the IRS as of December 2018 and made an adjustment of $36 million to reduce the pro- visional amount of the transition tax recorded in 2017 accordingly. 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 an additional income tax expense of $8 million for the transition tax accordingly. Uncertain Tax Positions We are subject to reviews, examinations and audits by Chinese tax authorities, the IRS and other taxing author- ities with respect to income and non-income based taxes. We recognize the benefit of positions taken or expected to be taken in our tax returns when it is more likely than not that the position would be sustained upon examination by 78 YUM CHINA – 2019 Form 10-K these tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. At December 31, 2019 and 2018, we had $19 million and $22 million, respectively, of unrecognized tax benefits related to the uncertainty with regard to the deductibility of certain business expenses incurred. We evaluate unrec- ognized tax benefits, including interest thereon, on a quar- terly basis to ensure that they have been appropriately adjusted for events, including audit settlements, which may impact our ultimate payment for such exposures. Since 2016, we have been under a national audit on trans- fer pricing by the STA in China regarding our related party transactions for the period from 2006 to 2015. The information currently exchanged with tax authorities focuses on our franchise arrangement with YUM. We have submitted information to the extent it is available to the Company. It is reasonably possible that there could be significant developments, including expert review and assessment by the STA, within the next 12 months. The ultimate assessment will depend upon further review of the information provided and ongoing technical and other discussions with the STA and in-charge local tax author- ities, and therefore it is not possible to reasonably estimate the potential impact. We will continue to defend our transfer pricing position. However, if the STA prevails in the assessment of additional tax due based on its ruling, the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations and cash flows. Unremitted Earnings of Foreign Subsidiaries We have investments in our foreign subsidiaries where the carrying values for financial reporting exceed the tax basis. We have not provided deferred tax on the portion of the excess that we believe is indefinitely reinvested, as we have the ability and intent to indefinitely postpone the basis differences from reversing with a tax consequence. The Company’s separation from YUM was intended to qualify as a tax-free reorganization for U.S. income tax purposes resulting in the excess of financial reporting basis over tax basis in our investment in the China busi- ness continuing to be indefinitely reinvested. The excess of tax basis as of December 31, 2017 was subject to the one-time transition reporting basis over financial tax under the Tax Act as a deemed repatriation of accu- mulated undistributed earnings from the foreign subsidi- aries. However, we continue to believe that the portion of the excess of financial reporting basis over tax basis (including earnings and profits subject to the one-time transition tax) is indefinitely reinvested in our foreign subsidiaries for foreign withholding tax purposes. We estimate that our total temporary difference for which we have not provided foreign withholding taxes is approxi- mately $2 billion at December 31, 2019. The foreign withholding tax rate on this amount is 5% or 10% depending on the manner of repatriation and the applica- ble tax treaties or tax arrangements. See Note 16 of the Consolidated Financial Statements for a further discussion of our income taxes. F o r m 1 0 - K YUM CHINA – 2019 Form 10-K 79 PART II ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Exchange Rate Risk Changes in foreign currency exchange rates impact the translation of our reported foreign currency-denominated earn- ings, cash flows and net investments in foreign operations, virtually all of which are denominated in RMB. While sub- stantially all of our supply purchases are denominated in RMB, from time to time, we enter into agreements at predetermined exchange rates with third parties to purchase certain amount of goods and services sourced overseas and make payments in local currencies when practical, to minimize the related foreign currency exposure with immaterial impact on our financial statements. As substantially all of the Company’s assets are located in China, the Company is exposed to movements in the RMB foreign currency exchange rate. For the year ended December 31, 2019, the Company’s operating profit would have decreased approximately $86 million if RMB weakened 10% relative to the U.S. dollar. This estimated reduction assumes no changes in sales volumes or local currency sales or input prices. Commodity Price Risk We are subject to volatility in food costs as a result of market risk associated with commodity prices. Our ability to recover increased costs through higher pricing is, at times, limited by the competitive environment in which we operate. We manage our exposure to this risk primarily through pricing agreements with our vendors. Investment Risk In September 2018, we invested $74 million in Meituan’s ordinary shares. The equity investment is recorded at fair value, which is measured on a recurring basis and is subject to market price volatility. See Note 5 of the Consolidated Financial Statements for a further discussion on our investment in Meituan. K - 0 1 m r o F 80 YUM CHINA – 2019 Form 10-K ITEM 8. Financial Statements and Supplementary Data. INDEX TO FINANCIAL INFORMATION Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017 Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017 Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017 Consolidated Balance Sheets as of December 31, 2019 and 2018 Consolidated Statements of Equity for the years ended December 31, 2019, 2018 and 2017 Notes to Consolidated Financial Statements Page Reference 82 85 86 87 88 89 90 Financial Statement Schedules No schedules are required because either the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the above-listed financial state- ments or notes thereto. F o r m 1 0 - K YUM CHINA – 2019 Form 10-K 81 PART II Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Yum China Holdings, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Yum China Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (col- lectively, the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”), as amended. Basis for Opinions K - 0 1 m r o F The Company’s management is responsible for these consolidated financial statements, for maintaining effective inter- nal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Com- pany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and per- form the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was main- tained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material mis- statement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and dis- closures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of 82 YUM CHINA – 2019 Form 10-K internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included per- forming such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detec- tion of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may dete- riorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially chal- lenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. F o r m 1 0 - K Assessment of impairment of long-lived assets of restaurants As discussed in Note 2 to the consolidated financial statements, the long-lived assets of the Company’s restaurants pri- marily include property, plant and equipment and operating lease right-of-use assets. An individual restaurant is the low- est level of independent cash flows unless the Company’s intent is to refranchise the restaurants as a group. For restaurant assets with an indicator that the carrying value may not be recoverable, the Company evaluates recoverability of these assets by comparing the forecasted undiscounted cash flows of the restaurant’s operations to the carrying value of such assets. For restaurant assets that are not deemed to be recoverable, the Company estimates the fair value of the restaurant assets based on the higher of the forecasted discounted cash flows of the restaurant’s operations and the price market par- ticipants would pay to sub-lease the operating lease right-of-use assets and acquire remaining restaurant assets. We identified the assessment of impairment of long-lived assets of restaurants as a critical audit matter because a high degree of subjective auditor judgment was required in assessing the Company’s assumptions used to estimate the forecasted cash flows of the restaurants’ operations. Specifically, in the recoverability test, the sales growth rates used to estimate the forecasted undiscounted cash flows were challenging to audit as they involve a high degree of subjectivity and minor YUM CHINA – 2019 Form 10-K 83 PART II changes to this assumption could have a significant effect on the restaurants’ forecasted cash flows. In addition, in deter- mining the fair value of the restaurant assets, specialized knowledge was required to assess the Company’s market rental assumptions for estimating the prices market participants would pay to sub-lease the operating lease right-of-use assets. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s impairment assessment process of long-lived assets of restaurants, including con- trols related to the determination of the significant assumptions of sales growth rates and market rental. We evaluated the sales growth rates by comparing to historical results and considering the Company’s operation plans for the restaurants. We performed sensitivity analyses over the sales growth rates to assess their impact on the restaurants’ forecasted undis- counted cash flows. We involved valuation professionals with specialized skills and knowledge, who assisted in: • Evaluating the market rental assumption by comparing it against independent market rental data; and • Developing an estimate of the price market participants would pay to sub-lease the operating lease right-of-use assets using the independently developed market rental data and comparing the result to the Company’s estimate. Evaluation of uncertain tax position As discussed in Notes 2 and 16 to the consolidated financial statements, the Company recognizes the benefit of positions taken or expected to be taken in tax returns in the financial statements when it is more likely than not (more than a 50% likelihood) that the position would be sustained upon examination by tax authorities. The Company is currently under a national audit on transfer pricing by the Chinese State Taxation Administration (“STA”) regarding certain related party transactions for the period from 2006 to 2015. We identified the evaluation of the Company’s uncertain tax position pertaining to the transfer pricing used in related party transactions as a critical audit matter. Specifically, a high degree of subjective auditor judgment was required in evaluating the Company’s interpretation of the applicable tax laws and regulations and its assessment of the uncertain tax position. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s uncertain tax position assessment process, including controls related to the inter- pretation of tax law and assessment of the potential impact. Since tax law is complex and often subject to interpretation, we involved tax professionals with specialized skills and knowledge, who assisted in: K - 0 1 m r o F • Reading the correspondence received by the Company from the tax authorities in connection with the STA audit, as well as responses and information the Company submitted to the tax authorities; • Evaluating the Company’s identification and consideration of information that could significantly affect the recogni- tion, measurement or disclosure of the uncertain tax position; and • Evaluating the Company’s interpretation of applicable tax laws and regulations, technical analysis and the application of the accounting standards in assessing the potential impact from the uncertain tax position. /s/ KPMG Huazhen LLP We have served as the Company’s auditor since 2016. Shanghai, China February 27, 2020 84 YUM CHINA – 2019 Form 10-K Consolidated Statements of Income Yum China Holdings, Inc. Years ended December 31, 2019, 2018 and 2017 (in US$ millions, except per share data) Revenues Company sales Franchise fees and income Revenues from transactions with franchisees and unconsolidated affiliates Other revenues Total revenues Costs and Expenses, Net Company restaurants Food and paper Payroll and employee benefits Occupancy and other operating expenses Company restaurant expenses General and administrative expenses Franchise expenses Expenses for transactions with franchisees and unconsolidated affiliates Other operating costs and expenses Closures and impairment expenses, net Other income, net Total costs and expenses, net Operating Profit Interest income, net Investment gain (loss) Income Before Income Taxes Income tax provision Net income—including noncontrolling interests Net income—noncontrolling interests Net Income—Yum China Holdings, Inc. Weighted-average common shares outstanding (in millions): Basic Diluted Basic Earnings Per Common Share Diluted Earnings Per Common Share See accompanying Notes to Consolidated Financial Statements. 2019 2018 2017 $ $ $ $ 7,925 148 654 49 8,776 2,479 1,807 2,373 6,659 487 71 645 37 36 (60) 7,875 901 39 63 1,003 (260) 743 30 713 377 388 1.89 1.84 $ $ $ $ 7,633 141 603 38 8,415 2,326 1,714 2,394 6,434 456 71 595 29 41 (152) 7,474 941 36 (27) 950 (214) 736 28 708 384 395 1.84 1.79 $ $ $ $ 6,993 141 599 36 7,769 2,034 1,543 2,245 5,822 495 71 592 28 47 (64) 6,991 778 25 — 803 (379) 424 26 398 387 398 1.03 1.00 F o r m 1 0 - K YUM CHINA – 2019 Form 10-K 85 PART II Consolidated Statements of Comprehensive Income Yum China Holdings, Inc. Years ended December 31, 2019, 2018 and 2017 (in US$ millions) Net income—including noncontrolling interests Other comprehensive (loss) income, net of tax of nil Foreign currency (loss) gain arising during the year Comprehensive income—including noncontrolling interests Comprehensive income—noncontrolling interests Comprehensive Income—Yum China Holdings, Inc. See accompanying Notes to Consolidated Financial Statements. 2019 2018 2017 743 $ 736 $ (32) 711 30 681 $ (160) 576 22 554 $ 424 142 566 31 535 $ $ K - 0 1 m r o F 86 YUM CHINA – 2019 Form 10-K Consolidated Statements of Cash Flows Yum China Holdings, Inc. Years ended December 31, 2019, 2018 and 2017 (in US$ millions) Cash Flows—Operating Activities Net income—including noncontrolling interests Depreciation and amortization Amortization of operating lease right-of-use assets Closures and impairment expenses Gain from re-measurement of equity interest upon acquisition Investment (gain) loss Equity income from investments in unconsolidated affiliates Distributions of income received from unconsolidated affiliates Deferred income taxes Share-based compensation expense Changes in accounts receivable Changes in inventories Changes in prepaid expenses and other current assets Changes in accounts payable and other current liabilities Changes in income taxes payable Changes in non-current operating lease liabilities Other, net Net Cash Provided by Operating Activities Cash Flows—Investing Activities Capital spending Purchases of short-term investments Maturities of short-term investments Acquisition of business, net of cash acquired Investment in equity securities Other, net Net Cash Used in Investing Activities Cash Flows—Financing Activities Repurchase of shares of common stock Cash dividends paid on common stock Dividends paid to noncontrolling interests Other, net Net Cash Used in Financing Activities Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash Cash, Cash Equivalents and Restricted Cash—Beginning of Year 2019 2018 2017 $ $ 743 428 339 36 — (63) (69) 73 16 26 (9) (77) (3) 171 (8) (381) (37) $ 736 445 — 41 (98) 27 (65) 63 33 24 (13) (23) (22) 254 17 — (86) 1,185 1,333 (435) (1,024) 534 — — 15 (910) (265) (181) (32) (2) (480) (6) (211) 1,266 (470) (604) 680 (91) (74) 7 (552) (307) (161) (36) (14) (518) (56) 207 1,059 424 409 — 47 — — (65) 45 62 26 1 (11) (15) (56) 3 — 14 884 (415) (596) 479 (25) — — (557) (128) (38) (22) 3 (185) 32 174 885 F o r m 1 0 - K Cash, Cash Equivalents and Restricted Cash—End of Year $ 1,055 $ 1,266 $ 1,059 Supplemental Cash Flow Data Cash paid for income tax 255 208 232 See accompanying Notes to Consolidated Financial Statements. YUM CHINA – 2019 Form 10-K 87 PART II Consolidated Balance Sheets Yum China Holdings, Inc. December 31, 2019 and 2018 (in US$ millions) ASSETS Current Assets Cash and cash equivalents Short-term investments Accounts receivable, net Inventories, net Prepaid expenses and other current assets Total Current Assets Property, plant and equipment, net Operating lease right-of-use assets Goodwill Intangible assets, net Deferred income taxes Investments in unconsolidated affiliates Other assets Total Assets LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY Current Liabilities Accounts payable and other current liabilities Income taxes payable Total Current Liabilities Non-current operating lease liabilities Non-current finance lease obligations Other liabilities Total Liabilities Redeemable Noncontrolling Interest K - 0 1 m r o F Equity Common stock, $0.01 par value; 1,000 million shares authorized; 395 million shares and 392 million shares issued at December 31, 2019 and 2018, respectively; 376 million shares and 379 million shares outstanding at December 31, 2019 and 2018, respectively Treasury stock Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total Yum China Holdings, Inc. Stockholders’ Equity Noncontrolling interests Total Equity 2019 2018 $ $ $ $ $ $ 1,046 611 88 380 134 2,259 1,594 1,985 254 94 95 89 580 6,950 $ $ 1,691 45 1,736 1,803 26 210 3,775 — 4 (721) 2,427 1,416 (49) 3,077 98 3,175 1,266 122 80 307 177 1,952 1,615 — 266 116 89 81 491 4,610 1,199 54 1,253 — 25 355 1,633 1 4 (460) 2,402 944 (17) 2,873 103 2,976 4,610 Total Liabilities, Redeemable Noncontrolling Interest and Equity $ 6,950 $ See accompanying Notes to Consolidated Financial Statements. 88 YUM CHINA – 2019 Form 10-K Consolidated Statements of Equity Yum China Holdings, Inc. Years ended December 31, 2019, 2018 and 2017 (in US$ millions) Common Stock Shares Amount Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Shares Amount Noncontrolling Interests Total Equity Redeemable Noncontrolling Interest Yum China Holdings, Inc. Balance at December 31, 2016 383 $ 4 $ 2,344 $ 37 $ — (1) $ (20) $ Net Income Foreign currency translation adjustment Comprehensive income Dividends declared Cash dividends declared ($0.10 per common share) Acquisition of business Repurchase of shares of common stock Exercise and vesting of share- based awards Share-based compensation 6 — 5 26 Balance at December 31, 2017 389 $ 4 $ 2,375 $ Net Income (loss) Foreign currency translation adjustment Comprehensive income (loss) Dividends declared Cash dividends declared ($0.42 per common share) Acquisition of business Repurchase of shares of common stock Exercise and vesting of share- based awards Share-based compensation Revaluation of redeemable noncontrolling interest 3 — — 24 3 Balance at December 31, 2018 392 $ 4 $ 2,402 $ Net Income (loss) Foreign currency translation adjustment Comprehensive income (loss) Dividends declared Cash dividends declared ($0.48 per common share) Repurchase of shares of common stock Exercise and vesting of share- based awards Share-based compensation Revaluation of redeemable noncontrolling interest Cumulative effect of accounting change 3 — — 26 (1) 398 (38) $ 397 708 (161) $ 944 713 (181) (60) 137 (3) (128) 137 (4) $ (148) $ (154) (9) (312) 66 26 5 (22) 2 77 29 (6) (33) 36 $ 2,431 $ 424 142 566 (22) (38) 2 (128) 5 26 $ 2,842 $ 737 (160) 577 (33) (161) 36 (312) — 24 3 (17) (13) $ (460) $ 103 $ 2,976 $ (32) (6) (261) 32 — (34) 745 (32) 713 (34) (181) (261) — 26 (1) (3) (63) Balance at December 31, 2019 395 $ 4 $ 2,427 $ 1,416 $ (49) (19) $ (721) $ 98 $ 3,175 $ See accompanying Notes to Consolidated Financial Statements. — — 5 5 (1) (1) (3) 1 (2) (2) 1 — F o r m 1 0 - K YUM CHINA – 2019 Form 10-K 89 PART II Notes to Consolidated Financial Statements (Tabular amounts in US$ millions, except for number of shares and per share data) Note 1—Description of Business Yum China Holdings, Inc. (“Yum China” and, together with its subsidiaries, the “Company,” “we,” “us,” and “our”) was incorporated in Delaware on April 1, 2016. The Company owns, franchises or has ownership in enti- ties that own and operate restaurants (also referred to as “stores” or “units”) under the KFC, Pizza Hut, Little Sheep, COFFii & JOY, East Dawning and Taco Bell con- cepts (collectively, the “concepts”). In connection with the separation of the Company in 2016 from its former parent company, Yum! Brands, Inc. (“YUM”), Yum! Restaurants Asia Pte. Ltd., a wholly-owned indirect sub- sidiary of YUM, and Yum Restaurants Consulting (Shanghai) Company Limited (“YCCL”), a wholly- owned indirect subsidiary of the Company, entered into a 50-year master license agreement with automatic renew- als for additional consecutive renewal terms of 50 years each, subject only to YCCL being in “good standing” and unless YCCL gives notice of its intent not to renew, for the exclusive right to use and sublicense the use of intel- lectual property owned by YUM and its subsidiaries for the development and operation of the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands and their related marks and other intel- lectual property rights for restaurant services in the Peo- ple’s Republic of China (the “PRC” or “China”), excluding Hong Kong, Taiwan and Macau. In exchange, we pay a license fee to YUM equal to 3% of net system sales from both our Company and franchise restaurants. We own the intellectual property of Little Sheep, COF- Fii & JOY and East Dawning, and pay no license fee related to these concepts. In 1987, KFC was the first quick-service restaurant brand to enter China. As of December 31, 2019, there are over 6,500 KFCs in China. We maintain a 58% and 70% con- trolling interest in the entities that own and operate the KFCs in Shanghai and Beijing, respectively. During the first quarter of 2018, the Company completed the acqui- sition of an additional 36% equity interest in an unconsol- 90 YUM CHINA – 2019 Form 10-K K - 0 1 m r o F idated affiliate that operates KFC stores in Wuxi, China (“Wuxi KFC”), for cash consideration of approximately $98 million, increasing the Company’s equity interest to 83%, allowing the Company to consolidate the entity. The acquisition was considered immaterial. We began con- solidating Wuxi KFC upon the completion of acquisition. We have a 47% noncontrolling ownership in each of our unconsolidated affiliates that own and operate KFCs in Hangzhou and Suzhou. The first Pizza Hut in China opened in 1990. As of December 31, 2019, there are over 2,200 Pizza Hut res- taurants in China. in interest holding company In 2017, the Company completed the acquisition of a con- of the trolling DAOJIA.com.cn (“Daojia”), an established online food delivery service provider. The Company agreed to pay cash consideration of $36.7 million to the sellers and made a concurrent capital contribution of $25.0 million to Daojia. As of the completion of the acquisition, the Com- pany held 90% of Daojia’s outstanding shares of common stock, or 80% of its equity interests on a fully-diluted basis. Daojia became an operating segment of the Com- pany. The acquisition was considered immaterial. The Company has two reportable segments: KFC and Pizza Hut. Our remaining operating segments, including the operations of Little Sheep, East Dawning, Taco Bell, Daojia, newly developed COFFii & JOY and our e-commerce business, with the latter two becoming oper- ating segments starting from the first quarter of 2019, are combined and referred to as All Other Segments, as those operating segments are insignificant both individually and in the aggregate. Segment financial information for prior years has been recast to align with this change in segment reporting. There was no impact to the consolidated finan- cial statements of the Company as a result of this change. Additional details on our segment reporting are included in Note 17. Note 2—Summary of Significant Accounting Policies Our preparation of the accompanying Consolidated Financial Statements in conformity with Generally Accepted Accounting Principles in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Basis of Preparation and Principles of Consolidation. Intercompany accounts and transactions have been elimi- nated in consolidation. We consolidate entities in which we have a controlling financial interest, the usual condi- tion of which is ownership of a majority voting interest. We also consider consolidating an entity in which we have certain interests where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consoli- dated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. Our most significant variable interests are in entities that operate restaurants under franchise arrangements. We do not generally have an equity interest in our franchisee businesses. Additionally, we do not typically provide sig- nificant financial support such as loans or guarantees to our franchisees. We have variable interests in certain enti- ties that operate restaurants under franchise agreements through real estate lease arrangements with them to which we are a party. At December 31, 2019, the Company had future lease payments due from franchisees, on a nominal basis, of approximately $47 million. As our franchise arrangements provide our franchisee entities the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might other- wise be considered a VIE. Through the acquisition of Daojia, the Company also acquired a VIE and subsidiaries of the VIE effectively controlled by Daojia. There exists a parent-subsidiary relationship between Daojia and its VIE as a result of cer- tain exclusive agreements that require Daojia to consoli- date its VIE and subsidiaries of the VIE because Daojia is the primary beneficiary that possesses the power to direct the activities of the VIE that most significantly impact its economic performance, and is entitled to substantially all of the profits and has the obligation to absorb all of the expected losses of the VIE. The acquired VIE and its sub- sidiaries were considered immaterial, both individually and in the aggregate. The results of Daojia’s operations have been included in the Company’s Consolidated Financial Statements since the acquisition date. We consolidate the entities that operate KFCs in Shanghai, Beijing and Wuxi where we have controlling interests of 58%, 70% and 83%, respectively. We report Net income attributable to noncontrolling interests, which includes the minority shareholders of the entities, sepa- rately on the face of our Consolidated Statements of Income. The portion of equity not attributable to the Company for these entities is reported within equity, sep- arately from the Company’s stockholders’ equity on the Consolidated Balance Sheets. We have a noncontrolling 47% interest in each of the enti- ties that operate the KFCs in Hangzhou and Suzhou. These entities are not VIEs and our lack of majority vot- ing rights precludes us from controlling these affiliates. Thus, we do not consolidate these affiliates. Instead, we account for them under the equity method. Our share of the net income or loss of these unconsolidated affiliates is included in Other income, net in our Consolidated State- ments of Income. F o r m 1 0 - K Comparative Information. Certain comparative items in the Consolidated Financial Statements have been reclassified to conform to the current year’s presentation to facilitate comparison. Fiscal Calendar. Our fiscal year ends on December 31. Effective at the beginning of fiscal 2018, the Company YUM CHINA – 2019 Form 10-K 91 PART II changed its fiscal calendar from two months in the first quarter, three months in the second and third quarters and four months in the fourth quarter, to four three-month quarters ending on March 31, June 30, September 30 and December 31 of each year. The change was made to align with how management measures performance internally and to facilitate the comparability of our results with peers using calendar quarters. Foreign Currency. Our functional currency for the oper- ating entities in China is the Chinese Renminbi (“RMB”), the currency of the primary economic environment in which they operate. Income and expense accounts for our operations are then translated into U.S. dollars at the aver- age exchange rates prevailing during the period. Assets and liabilities are then translated into U.S. dollars at exchange rates in effect at the balance sheet date. As of December 31, loss of 2019, net cumulative translation adjustment $49 million was recorded in Accumulated other compre- hensive loss on the Consolidated Balance Sheets. Gains and losses arising from the impact of foreign currency exchange rate fluctuations on transactions in foreign cur- rency, to the extent they arise, are included in Other income, net in our Consolidated Statements of Income. Franchise Operations. We execute agreements which set out the terms of our arrangement with franchisees. Our franchise agreements typically require the franchisee to pay an initial, non-refundable fee and continuing fees based upon a percentage of sales. Subject to our approval and their payment of a renewal fee, a franchisee may gen- erally renew the franchise agreement upon its expiration. K - 0 1 m r o F The 3% license fees we pay to YUM for the right to subli- cense the KFC, Pizza Hut and Taco Bell intellectual prop- erty to franchisees and unconsolidated affiliates are recorded in Franchise expenses. License fees due to YUM for our Company-owned stores are included within res- taurant margin in Occupancy and other operating license fees paid to YUM were expenses. Total $273 million, $263 million and $245 million during the years ended December 31, 2019, 2018 and 2017, respec- tively. Certain direct costs of our franchise operations are charged to Franchise expenses. These costs include pro- visions for estimated uncollectible fees, rent or deprecia- 92 YUM CHINA – 2019 Form 10-K tion expense associated with restaurants we sub-lease to franchisees, and certain other direct incremental franchise support costs. We also have certain transactions with franchisees and unconsolidated affiliates, which consist primarily of sales of food and paper products, advertising services and other services provided to franchisees and unconsolidated affiliates. Related expenses are included in Expenses for transactions with franchisees and unconsolidated affili- ates. Revenue Recognition. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Account- ing Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), to provide principles within a single framework for revenue recognition of transactions involving contracts with customers across all industries. The standard allows for either a full retrospective or modified retrospective transition method. Additional amendments were subse- quently issued by the FASB to clarify the implementation guidance. The Company adopted these standards on January 1, 2018, and applied the full retrospective approach. The Company’s revenues primarily include Company sales, Franchise fees and income and Revenues from trans- actions with franchisees and unconsolidated affiliates. Company Sales Revenues from Company-owned restaurants are recog- nized when a customer takes possession of the food and tenders payment, which is when our obligation to perform is satisfied. The Company presents sales net of sales- related taxes. We also offer our customers delivery through both our own mobile applications and third-party aggregators’ platforms. For delivery orders placed through our mobile applications, we use our dedicated riders, while for orders placed through third-party aggre- gators’ platforms, we either used our dedicated riders or third-party aggregators’ delivery staff in the past. With respect to delivery orders delivered by our dedicated riders, we control and determine the price for the delivery service and generally recognize revenue, including deliv- ery fees, when a customer takes possession of the food. When orders are fulfilled by the delivery staff of third- party aggregators, who control and determine the price for the delivery service, we recognize revenue, excluding delivery fees, when control of the food is transferred to the third-party aggregators’ delivery staff. The payment terms with respect to these sales are short-term in nature. Start- ing in 2019, we used our own dedicated riders to deliver orders placed through aggregators’ platforms to custom- ers of KFC and Pizza Hut stores. We recognize revenues from prepaid stored-value prod- ucts, including gift cards and product vouchers, when they are redeemed by the customer. Prepaid gift cards sold at any given point generally expire over the next 36 months, and product vouchers generally expire over a period of up to 12 months. We recognize breakage revenue, which is the amount of prepaid stored-value products that is not expected to be redeemed, either (1) proportionally in earn- ings as redemptions occur, in situations where the Com- pany expects to be entitled to a breakage amount, or (2) when the likelihood of redemption is remote, in situa- tions where the Company does not expect to be entitled to breakage, provided that there is no requirement for remit- ting balances to government agencies under unclaimed property laws. The Company reviews its breakage esti- mates at least annually based upon the latest available information regarding redemption and expiration patterns. Our privilege membership programs offer privilege mem- bers rights to multiple benefits, such as free delivery and discounts on certain products. For certain KFC and Pizza Hut privilege membership programs offering a pre-defined amount of benefits that can be redeemed ratably over the membership period, revenue is ratably recognized over the period based on the elapse of time. With respect to the Pizza Hut family privilege membership program offering mem- bers a mix of distinct benefits, including a welcome gift and assorted discount coupons with pre-defined quantities, consideration collected is allocated to the benefits provided based on their relative standalone selling price and revenue is recognized when food or services are delivered or the benefits expire. In determining the relative standalone sell- ing price of the benefits, the Company considers likelihood of future redemption based on historical redemption pattern and reviews such estimates periodically based upon the lat- est available information regarding redemption and expi- ration patterns. Franchise Fees and Income Franchise fees and income primarily include upfront franchise fees, such as initial fees and renewal fees, and continuing fees. We have determined that the services we provide in exchange for upfront franchise fees and con- tinuing fees are highly interrelated with the franchise right. We recognize upfront franchise fees received from a franchisee as revenue over the term of the franchise agreement or the renewal agreement because the fran- chise rights are accounted for as rights to access our sym- bolic intellectual property in accordance with ASC 606. The franchise agreement term is generally 10 years for KFC and Pizza Hut, and five or 10 years for Little Sheep. We recognize continuing fees, which are based upon a percentage of franchisee sales, as those sales occur. Revenues from Transactions with Franchisees and Unconsolidated Affiliates Revenues from transactions with franchisees and uncon- solidated affiliates consist primarily of sales of food and paper products, advertising services and other services provided to franchisees and unconsolidated affiliates. The Company centrally purchases substantially all food and paper products from suppliers for substantially all of our restaurants, including franchisees and unconsolidated affiliates, and then sells and delivers them to the restau- rants. The performance obligation arising from such transactions is considered distinct from the franchise agreement as it is not highly dependent on the franchise agreement and the customer can benefit from the pro- curement service on its own. We consider ourselves the principal in this arrangement as we have the ability to control a promised good or service before transferring that good or service to the franchisees and unconsolidated affiliates. Revenue is recognized upon transfer of control over ordered items, generally upon delivery to the fran- chisees and unconsolidated affiliates. For advertising services, the Company often engages third parties to provide services and acts as a principal in the transaction based on our responsibilities of defining the nature of the services and administering and directing all marketing and advertising programs in accordance with the provisions of our franchise agreements. The Company YUM CHINA – 2019 Form 10-K 93 F o r m 1 0 - K PART II collects advertising contributions, which are generally based on certain percentage of sales from substantially all of our restaurants, including franchisees and unconsoli- dated affiliates. Other services provided to franchisees and unconsolidated affiliates consist primarily of cus- tomer and technology support services. Advertising ser- vices and other services provided are highly interrelated to franchise right, and are not considered individually dis- tinct. We recognize revenue when the related sales occur. Loyalty Programs Each of the Company’s KFC and Pizza Hut reportable segments operates a loyalty program that allows regis- tered members to earn points for each qualifying pur- chase. Points, which generally expire 18 months after being earned, may be redeemed for future purchases of KFC or Pizza Hut branded products or other products for free or at a discounted price. Points cannot be redeemed or exchanged for cash. The estimated value of points earned by the loyalty program members is recorded as a reduc- tion of revenue at the time the points are earned, based on the percentage of points that are projected to be redeemed, with a corresponding deferred revenue liability included in Accounts payable and other current liabilities on the Consolidated Balance Sheets and subsequently recog- nized into revenue when the points are redeemed or expire. The Company estimates the value of the future redemption obligations based on the estimated value of the product for which points are expected to be redeemed and historical redemption patterns and reviews such esti- mates periodically based upon the latest available infor- mation regarding redemption and expiration patterns. Direct Marketing Costs. We charge direct marketing costs to expense ratably in relation to revenues over the year in which incurred and, in the case of advertising production costs, in the year the advertisement is first shown. Deferred direct marketing costs, which are classified as prepaid expenses, consist of media and related advertising produc- tion costs which will generally be used for the first time in the next fiscal year and have historically not been signifi- incurred for cant. Our direct marketing expenses Company-owned $344 million, restaurants were $341 million and $333 million in 2019, 2018 and 2017, respectively, and were included in Occupancy and other operating expenses. In addition, the direct marketing costs 94 YUM CHINA – 2019 Form 10-K K - 0 1 m r o F incurred for franchisees and unconsolidated affiliates were $65 million, $62 million and $69 million in 2019, 2018 and 2017, respectively, and were recorded in Expenses for transactions with franchisees and unconsolidated affiliates. Research and Development Expenses. Research and development expenses associated with our food innova- tion activities, which are expensed as incurred, are reported in G&A expenses. Research and development expenses were $4 million, $4 million and $5 million in 2019, 2018 and 2017, respectively. Share-Based Compensation. Prior to the separation, all employee equity awards were granted by YUM. Upon the separation, holders of outstanding YUM equity awards generally received both adjusted YUM awards and Yum China awards, or adjusted awards of either YUM or Yum China in their entirety, to maintain the pre-separation intrinsic value of the awards. The modified equity awards have the same terms and conditions as the awards held immediately before the separation, except the number of shares and the price were adjusted. The incremental com- pensation cost, measured as the excess of the fair value of the award immediately after the modification over the fair value of the award immediately before the modification, based on Black-Scholes option-pricing model was imma- terial, and YUM and the Company continue to recognize the unamortized fair value of the awards over the remain- ing requisite service period as their respective employees continue to provide services. All awards granted follow- ing the separation were granted under the Company’s Long Term Incentive Plan (the “2016 Plan”). We recog- nize all share-based payments to employees and directors, including grants of stock options, restricted stock units (“RSUs”), stock appreciation rights (“SARs”) and per- formance share units (“PSUs”), in the Consolidated Financial Statements as compensation cost over the ser- vice period based on their fair value on the date of grant. This compensation cost is recognized over the service period on a straight-line basis, net of an assumed forfei- ture rate, for awards that actually vest. Forfeiture rates are estimated at grant date based on historical experience and compensation cost is adjusted in subsequent periods for differences in actual forfeitures from the previous esti- mates. We present this compensation cost consistent with the other compensation costs for the employee recipient in either payroll and employee benefits or G&A expenses. Impairment or Disposal of Long-Lived Assets. Long- lived assets, primarily Property, plant and equipment (“PP&E”) and operating lease right-of-use (“ROU”) assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The assets are not recoverable if their carrying value is less than the undis- counted cash flows we expect to generate from such assets. If the assets are not deemed to be recoverable, impairment is measured based on the excess of their car- rying value over their fair value. For purposes of impairment testing for our restaurants, we have concluded that an individual restaurant is the lowest level of independent cash flows unless our intent is to refranchise restaurants as a group. We review our long- lived assets of such individual restaurants (primarily operating lease ROU assets and PP&E) semi-annually for impairment, or whenever events or changes in circum- stances indicate that the carrying amount of a restaurant may not be recoverable. Our primary indicators of poten- tial impairment for our semi-annual impairment testing of these restaurant assets include two consecutive years of operating losses after a restaurant has been open for three years. We evaluate the recoverability of these restaurant assets by comparing the forecasted undiscounted cash flows of the restaurant’s operation, which are based on our entity-specific assumptions, to the carrying value of such assets. The forecasted undiscounted cash flows incorporate our best estimate of sales growth based upon our operation plans for the unit and actual results at com- parable restaurants. For restaurant assets that are not deemed to be recoverable, we write down an impaired restaurant to its estimated fair value, which becomes its new cost basis. Fair value is an estimate of the price mar- ket participants would pay for the restaurant and its related assets. In determining the fair value of restaurant-level assets, we considered the highest and best use of the assets from market participants’ perspective, which is repre- sented by the higher of the forecasted discounted cash flows from operating restaurants and the price market participants would pay to sub-lease the operating lease ROU assets and acquiring remaining restaurant assets, even if that use differs from the current use by the Com- pany. The after-tax cash flows incorporate reasonable assumptions we believe a franchisee would make such as sales growth and include a deduction for royalties we would receive under a franchise agreement with terms substantially at market. The discount rate used in the fair value calculation is our estimate of the required rate-of-return that a franchisee would expect to receive when purchasing a similar restaurant and the related long- lived assets. The discount rate incorporates rates of returns for historical refranchising market transactions and is commensurate with the risks and uncertainty inherent in the forecasted cash flows. Estimates of the price market participants would pay to sub-lease the operating lease ROU assets are based on comparable market rental infor- mation that could be reasonably obtained for the property. In situations where the highest and best use of the restau- rant level assets from market participants’ perspective is lease represented right-of-use assets and acquiring remaining restaurant assets, the Company continues to use these assets in oper- ating its restaurant business, which is consistent with its long-term strategy of growing revenue through operating restaurant concepts. sub-leasing operating the by When we believe it is more likely than not a restaurant or groups of restaurants will be refranchised for a price less than their carrying value, but do not believe the restaurant(s) have met the criteria to be classified as held for sale, we review the restaurants for impairment. We evaluate the recoverability of these restaurant assets by comparing estimated sales proceeds plus holding period cash flows, if any, to the carrying value of the restaurant or group of restaurants. For restaurant assets that are not deemed to be recoverable, we recognize impairment for any excess of carrying value over the fair value of the res- taurants, which is based on the expected net sales pro- ceeds. To the extent ongoing agreements to be entered into with the franchisee simultaneous with the refranchis- ing are expected to contain terms, such as royalty rates, not at prevailing market rates, we consider the off-market terms in our impairment evaluation. We recognize any such impairment charges in Refranchising gain. Refran- chising gain includes the gains or losses from the sales of our restaurants to new and existing franchisees, including any impairment charges discussed above. We recognize gains on restaurant refranchising when the sale transac- tion closes, the franchisee has a minimum amount of the purchase price in at-risk equity and we are satisfied that the franchisee can meet its financial obligations. F o r m 1 0 - K YUM CHINA – 2019 Form 10-K 95 PART II When we decide to close a restaurant, it is reviewed for impairment, and depreciable lives are adjusted based on the expected disposal date. Other costs incurred when closing a restaurant such as costs of disposing of the assets as well as other facility-related expenses are generally expensed as incurred. Additionally, at the time we decide to close a restaurant, we reassess whether it is reasonably certain that we will exercise the termination option, and remeasure lease liability to reflect changes in lease term and remaining lease payments based on the planned exit date, if applicable. The amount of the re-measurement of the lease liability is recorded as an adjustment to the oper- ating lease ROU asset first, with any remaining amount recorded in Closures and impairment expenses if the car- rying amount of the operating lease ROU asset is reduced to zero. Any costs recorded upon store closure as well as any subsequent adjustments to remaining operating lease ROU assets and lease liabilities as a result of lease termi- nation are recorded in Closures and impairment expenses. In the event we are forced to close a store and receive compensation for such closure, that compensation is recorded in Closures and impairment expenses. To the extent we sell assets associated with a closed store, any gain or loss upon that sale is also recorded in Closures and impairment expenses. Considerable management judgment is necessary to esti- mate future cash flows, including cash flows from con- tinuing use, terminal value, lease term and refranchising proceeds. Accordingly, actual results could vary signifi- cantly from our estimates. Government Subsidies. Government subsidies primar- ily consist of financial subsidies received from provincial and local governments for operating a business in their jurisdictions and compliance with specific policies promoted by the local governments. There are no defined rules and regulations to govern the criteria necessary for companies to receive such benefits, and the amount of financial subsidy is determined at the discretion of the rel- evant government authorities. Government subsidies are recognized when it is probable that the Company will comply with the conditions attached to them, and the sub- sidies are received. If the subsidy is related to an expense item, it is recognized as a reduction to the related expense to match the subsidy to the costs that it is intended to com- pensate. If the subsidy is related to an asset, it is deferred 96 YUM CHINA – 2019 Form 10-K K - 0 1 m r o F and recorded in other liabilities and then recognized rat- ably over the expected useful life of the related asset in the Consolidated Statements of Income. Income Taxes. We record deferred tax assets and liabil- ities for the future tax consequences attributable to tem- porary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss, capital loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differ- ences or carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Additionally, in deter- mining the need for recording a valuation allowance against the carrying amount of deferred tax assets, we consider the amount of taxable income and periods over which it must be earned, actual levels of past taxable income and known trends and events or transactions that are expected to affect future levels of taxable income. Where we determine that it is more likely than not that all or a portion of an asset will not be realized, we record a valuation allowance. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law effective for tax years beginning after December 31, 2017. The Tax Act requires complex computations with significant estimates to be performed, significant judgments to be made in interpre- tation of the provisions, and the preparation and analysis of information not previously relevant or regularly pro- duced. The U.S. Treasury Department, the IRS, the SEC and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Act will be applied or otherwise administered that is different from our current interpretation. We completed our analysis of the Tax Act in the fourth quarter of 2018 according to guidance released by the U.S. Treasury Department and the IRS as of December 2018 and made an adjustment of $36 million to reduce the provisional amount for transi- tion tax recorded in 2017 accordingly. 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 an additional income tax expense of $8 million for the transition tax accordingly. We are subject to reviews, examinations and audits by Chinese tax authorities, the IRS and other taxing author- ities with respect to income and non-income based taxes. We recognize the benefit of positions taken or expected to be taken in our tax returns when it is more likely than not that the position would be sustained upon examination by these tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. We evaluate unrecognized tax benefits, including interest thereon, on a quarterly basis to ensure that they have been appropriately adjusted for events, including audit settle- ments, which may impact our ultimate payment for such exposures. We have investments in our foreign subsidiaries where the carrying values for financial reporting exceed the tax basis. We have not provided deferred tax on the portion of the excess that we believe is indefinitely reinvested, as we have the ability and intent to indefinitely postpone the basis differences from reversing with a tax consequence. The Company’s separation from YUM was intended to qualify as a tax-free reorganization for U.S. income tax purposes resulting in the excess of financial reporting basis over tax basis in our investment in the China busi- ness continuing to be indefinitely reinvested. The excess of tax basis as of December 31 2017 was subject to the one-time transition tax under the Tax Act as a deemed repatriation of accu- mulated undistributed earnings from the foreign subsidi- aries. However, we continue to believe that the portion of the excess of financial reporting basis over tax basis (including earnings and profits subject to the one-time transition tax) is indefinitely reinvested in our foreign subsidiaries for foreign withholding tax purposes. reporting basis over financial with mainland China that provides for a 5% withholding tax on dividends distributed to a Hong Kong resident enterprise, upon meeting certain conditions and require- ments, including, among others, that the Hong Kong resi- dent enterprise own at least 25% equity interest of the Chinese enterprise and is a “beneficial owner” of the divi- dends. We believe that our Hong Kong subsidiary, which is the equity holder of our Chinese subsidiaries, 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 the subsequent years; thus, it is more likely than not that our dividends declared or earnings expected to be repatriated since 2018 are subject to the reduced withholding tax of 5%. See Note 16 for a further discussion of our income taxes. Fair Value Measurements. Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market par- ticipants. For those assets and liabilities we record or dis- close at fair value, we determine fair value based upon the quoted market price, if available. If a quoted market price is not available for identical assets, we determine fair value based upon the quoted market price of similar assets or the present value of expected future cash flows consid- ering the risks involved, including counterparty perfor- mance risk if appropriate, and using discount rates appropriate for the duration. The fair values are assigned a level within the fair value hierarchy, depending on the source of the inputs into the calculation. Level 1 Level 2 Inputs based upon quoted prices in active markets for identical assets. Inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly. F o r m 1 0 - K Pursuant to the China Enterprise Income Tax Law (“EIT Law”), a 10% PRC withholding tax is generally levied on dividends declared by companies in China to their investors unless otherwise non-resident reduced according to treaties or arrangements between the Chinese central government and the governments of other countries or regions where the non-China resident enter- prises are incorporated. Hong Kong has a tax arrangement enterprise Level 3 Inputs that are unobservable for the asset. Cash and Cash Equivalents. Cash equivalents represent highly liquid investments with original maturities not exceeding three months and are primarily comprised of time deposits and money market funds. Cash and over- draft balances that meet the criteria for right to offset are presented net on our Consolidated Balance Sheets. YUM CHINA – 2019 Form 10-K 97 PART II Short-term Investments. Short-term investments pri- marily represent time deposits with original maturities of over three months but less than one year when purchased. Accounts Receivable. Accounts Receivable consist of trade receivables and royalties from franchisees and unconsolidated affiliates, and are generally due within 30 days of the period in which the corresponding sales occur and are classified as Accounts receivable on the Con- solidated Balance Sheets. Our provision for uncollectible receivable balances is based upon pre-defined aging criteria or upon the occurrence of other events that indicate that we may not collect the balance due. Additionally, we monitor the financial condition of our franchisees and record provi- sions for estimated losses on receivables when we believe it is probable that our franchisees will be unable to make their required payments. While we use the best information available in making our determination, the ultimate recov- ery of recorded receivables is also dependent upon future economic events and other conditions that may be beyond our control. Trade receivables that are ultimately deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for doubt- ful accounts. Receivables due from unconsolidated affili- ates including trade receivables and dividend receivables were $58 million and $65 million as of December 31, 2019 and 2018, respectively. Processors from Payment or Receivables Aggregators. Receivables from payment processors such as WeChat and Alipay or aggregators are cash due from them for clearing transactions and are included in Prepaid expenses and other current assets. The cash was paid by customers through these payment processors or aggrega- tors for food provided by the Company. The Company considers and monitors the credit worthiness of the third- party payment processors and aggregators used. An allowance for doubtful accounts is recorded in the period in which a loss is determined to be probable. Receivable balances are written off after all collection efforts have been exhausted. As of December 31, 2019 and 2018, no allowance for doubtful accounts was provided for such receivables. K - 0 1 m r o F Property, Plant and Equipment. We state PP&E at cost less accumulated depreciation and amortization. We cal- culate depreciation and amortization on a straight-line basis over the estimated useful lives of the assets as fol- lows: 20 to 50 years for buildings, the lesser of estimated useful lives (5 to 10 years) and remaining lease term for leasehold improvements, 3 to 10 years for restaurant machinery and equipment and 3 to 5 years for capitalized software costs. We suspend depreciation and amortization on assets related to restaurants that are held for sale. Leases. The Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”) and subsequent amendments issued by FASB on January 1, 2019, using a modified retrospective method for leases that exist at, or are entered into after, January 1, 2019, and has not recast the comparative periods pre- sented in the Consolidated Financial Statements. Prior to the adoption of ASC 842, operating leases were not recognized on the balance sheet of the Company, but rent expenses with fixed escalating payments and/or rent holidays were recognized on a straight-line basis over the lease term. Contingent rentals are generally based on sales levels, and thus are included in rent expense when attain- ment of the contingency is considered probable (e.g., when Company sales occur). Upon adoption of ASC 842, ROU assets and lease liabil- ities are recognized upon lease commencement for oper- ating leases based on the present value of lease payments over the lease term. As the rate implicit in the lease cannot be readily determined, we use our incremental borrowing rate at the lease commencement date in determining the imputed interest and present value of lease payments. The incremental borrowing rate was determined using a port- folio approach based on the rate of interest that we would have to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The incremental borrowing rate is primarily influenced by the risk-free interest rate of China, the Company’s credit rating and lease term, and is updated on a quarterly basis for mea- surement of new lease liabilities. Inventories. We value our inventories at the lower of cost (computed on the first-in, first-out method) or net realiz- able value. For operating leases, the Company recognizes a single lease cost on a straight-line basis over the remaining lease term. For finance leases, the Company recognizes straight- 98 YUM CHINA – 2019 Form 10-K line amortization of the ROU asset and interest on the lease liability. This is consistent with the historical recognition of finance leases, which was unchanged upon adoption of ASC 842. For rental payments either based on a percentage of the restaurant’s sales in excess of a fixed base amount or solely based on a percentage of the restaurant’s sales, they are recognized as variable lease expenses as incurred. The Company has elected not to recognize ROU assets or lease liabilities for leases with an initial term of 12 months or less; we recognize lease expense for these leases on a straight-line basis over the lease term. In addition, the Company has elected not to separate non-lease compo- nents (e.g., common area maintenance fees) from the lease components. From time to time, we purchase the rights to use government-owned land and the building occupying the land for a fixed period of time. Prior to the adoption of ASC 842, these land use rights and related buildings were recorded in Other Assets and Property, Plant and Equip- ment in our Consolidated Balance Sheets, and are amor- tized on a straight-line basis over the term of the land use right. Upon the adoption of ASC 842 on January 1, 2019, land use rights acquired are assessed in accordance with ASC 842 and recognized in right-of-use assets if they meet the definition of lease. See Note 11 for further discussions on our leases. Internal Development Costs and Abandoned Site Costs. We capitalize direct costs associated with the site acquisition and construction of a Company unit on that site, including direct internal payroll and payroll-related costs. Only those site-specific costs incurred subsequent to the time that the site acquisition is considered probable are capitalized. If we subsequently make a determination that it is probable a site for which internal development costs have been capitalized will not be acquired or devel- oped, any previously capitalized internal development costs are expensed and included in G&A expenses. Goodwill and Intangible Assets. From time to time, the Company acquires restaurants from our existing franchi- sees or acquires another business, including restaurants business of unconsolidated affiliates. Goodwill from these acquisitions represents the excess of the cost of a business acquired over the net of the amounts assigned to assets acquired, including identifiable intangible assets and liabilities assumed. Goodwill is not amortized and has been assigned to reporting units for purposes of impair- ment testing. Our reporting units are our individual oper- ating segments. We evaluate goodwill for impairment on an annual basis or more often if an event occurs or circumstances change that indicate impairment might exist. We have selected the beginning of our fourth quarter as the date on which to perform our ongoing annual impairment test for goodwill. We may elect to perform a qualitative assessment for our reporting units to determine whether it is more likely than not that the fair value of the reporting unit is greater than its carrying value. If a qualitative assessment is not per- formed, or if as a result of a qualitative assessment it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, then the reporting unit’s fair value is compared to its carrying value. Fair value is the price a willing buyer would pay for a reporting unit, and is generally estimated using discounted expected future after-tax cash flows from the business operation of the reporting unit. The discount rate is our estimate of the required rate-of-return that a third-party buyer would expect to receive when purchasing a business from us that constitutes a reporting unit. We believe the discount rate is commensurate with the risks and uncertainty inherent in the forecasted cash flows. If the carrying value of a reporting unit exceeds its fair value, we will record an impairment charge based on that difference. The impair- ment charge will be limited to the amount of goodwill allocated to that reporting unit. If we record goodwill upon acquisition of a restaurant(s) from a franchisee and such restaurant(s) is then sold within two years of acquisition, the goodwill associated with the acquired restaurant(s) is written off in its entirety. If the restaurant is refranchised two years or more subse- quent to its acquisition, we include goodwill in the carry- ing amount of the restaurants disposed of based on the relative fair values of the portion of the reporting unit dis- posed of in the refranchising and the portion of the report- ing unit that will be retained. We evaluate the remaining useful life of an intangible asset that is not being amortized each reporting period to YUM CHINA – 2019 Form 10-K 99 F o r m 1 0 - K PART II determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is subsequently determined to have a finite useful life, we amortize the intangible asset pro- spectively over its estimated remaining useful life. Intan- gible assets that are deemed to have a finite life are generally amortized on a straight-line basis to their resid- ual value. We evaluate our indefinite-lived intangible assets for impairment on an annual basis or more often if an event occurs or circumstances change that indicate impairments might exist. We perform our annual test for impairment of our indefinite-lived intangible assets at the beginning of our fourth quarter. We may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is greater than its carrying value. If a qualitative assessment is not performed, or if as a result of a qualitative assess- ment it is not more likely than not that the fair value of an indefinite-lived intangible asset exceeds its carrying value, then the asset’s fair value is compared to its carry- ing value. Fair value is an estimate of the price a willing buyer would pay for the intangible asset and is generally estimated by discounting the expected future after-tax cash flows associated with the intangible asset. Our finite-lived intangible assets that are not allocated to an individual restaurant are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable. An intangible asset that is deemed not recov- erable based on forecasted undiscounted future cash flow is written down to its estimated fair value, which is our estimate of the price a willing buyer would pay for the intangible asset based on discounted expected future after-tax cash flows. For purposes of our impairment analysis, we update the cash flows that were initially used to value the finite-lived intangible asset to reflect our cur- rent estimates and assumptions over the asset’s future remaining life. During the year ended December 31, 2019 and 2018, we recorded an impairment charge of $11 million and $12 million, respectively, on intangible assets and goodwill attributable to the Daojia business. See Note 5 for additional details. K - 0 1 m r o F 100 YUM CHINA – 2019 Form 10-K Equity Investments. The Company’s equity investments include investments in unconsolidated affiliates and investments in equity securities with readily determinable fair value. The Company applies the equity method to account for the investments in unconsolidated affiliates over which it has significant influence but does not control. Equity method investments are included as Investments in unconsolidated affiliates on our Consolidated Balance Sheets. Our share of the earnings or losses of equity method investees are included within Other income, net on our Consolidated Statements of Income. We record impairment charges related to an investment in an uncon- solidated affiliate whenever events or circumstances indi- cate that a decrease in the fair value of an investment has occurred which is other than temporary. In addition, we evaluate our investments in unconsolidated affiliates for impairment when they have experienced two consecutive years of operating losses. For our investments in equity securities with readily determinable fair value, over which the Company has nei- ther significant influence nor control, they are measured at fair value with subsequent changes recognized in net income. Financial Instruments. We account for derivative instruments and liability-classified equity contracts (e.g., warrants) as either assets or liabilities in the Consolidated Balance Sheets. The financial instruments are recorded at their respective fair value as determined on the day of issuance and subsequently adjusted to the fair value at each reporting date. Changes in the fair value of financial instruments are recognized periodically in the Consoli- dated Statements of Income. The estimated fair values of derivative instruments and liability-classified equity con- tracts are determined at discrete points in time using stan- dard valuation techniques. Guarantees. We account for guarantees in accordance with ASC Topic 460 (“ASC 460”), Guarantees. Accord- ingly, the Company evaluates its guarantees to determine whether (a) the guarantee is specifically excluded from the scope of ASC 460, (b) the guarantee is subject to ASC 460 disclosure requirements only, but not subject to the at fair value. The Company initial recognition and measurement provisions, or (c) the guarantee is required to be recorded in the financial state- ments provides: (i) indemnifications to certain investors and other parties for certain losses suffered or incurred by the indemnified party in connection with third-party claims; and (ii) indemnifications of officers and directors against third-party claims arising from the services they provide to the Company. To date, the Company has not incurred costs as a result of these obligations and does not expect to incur material costs in the future. Accordingly, the Com- pany has not accrued any liabilities on the Consolidated Balance Sheets related to these indemnifications. Asset Retirement Obligations. We recognize an asset and a liability for the fair value of a required asset retire- ment obligation (“ARO”) when such an obligation is incurred. The Company’s AROs are primarily associated with leasehold improvements which, at the end of the lease, the Company is contractually obligated to remove in order to comply with the lease agreement. As such, we amortize the asset on a straight-line basis over the lease term and accrete the liability to its nominal value using the effective interest method over the lease term. Contingencies. The Company records accruals for cer- tain of its outstanding legal proceedings or claims when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. The Company evalu- ates, on a quarterly basis, developments in legal proceedings or claims that could affect the amount of any accrual, as well as any developments that would make a loss contingency both probable and reasonably estimable. The Company discloses the amount of the accrual if it is material. Retirement Plans. Certain of the Company’s employees participate in noncontributory defined benefit plans and post-retirement medical plans sponsored by YUM prior to October 31, 2016. Subsequent to the separation, employ- ees participating in YUM’s plans were enrolled in the Yum China Holdings, Inc. Leadership Retirement Plan (“YCHLRP”), an unfunded, unsecured account-based retirement plan which allocates a percentage of pay to an account payable to the executive following the execu- tive’s separation of employment from the Company or attainment of age 55. The Company also offers other defined contribution plans to employees. The total contribution for such employee benefits was expensed as incurred. The Company has no additional legal obligation or liabilities for the benefits beyond the paid and accrued amounts. See Note 13 for additional information. PRC Value-Added Tax. The Company has been subject to VAT within the normal course of its restaurant business nationwide since May 1, 2016. Entities that are VAT general taxpayers are permitted to offset qualified input VAT paid to suppliers against their output VAT upon receipt of appropriate supplier VAT invoices on an entity-by-entity basis. When the output VAT exceeds the input VAT, the difference is remitted to tax authorities, usually on a monthly basis; whereas when the input VAT exceeds the output VAT, the difference is treated as an input VAT credit asset which can be carried forward indefinitely to offset future net VAT payables. VAT related to purchases and sales which have not been settled at the balance sheet date is disclosed separately as an asset and liability, respectively, on the Consolidated Balance Sheets. At each balance sheet date, the Company reviews the outstanding balance of any input VAT credit asset for recoverability, giving consideration to the indef- inite life of the input VAT credit assets as well as its fore- casted operating results and capital spending, which inherently includes significant assumptions that are sub- ject to change. As of December 31, 2019 and 2018, an input VAT credit asset of $243 million and $226 million, were recorded in Other assets, respectively, and payable of $5 million and $5 million, were recorded in Accounts payable and other current liabilities, respectively, on the Consolidated Bal- ance Sheets. The Company has not made an allowance for the recoverability of the input VAT credit asset, as the balance is expected to be utilized to offset against VAT payables more than one year from December 31, 2019. Any input VAT credit asset would be classified as Prepaid expenses and other current assets if the Company expected to use the credit within one year. Earnings Per Share. Basic earnings per share represent net earnings to common stockholders divided by the weighted-average number of common shares outstanding YUM CHINA – 2019 Form 10-K 101 F o r m 1 0 - K PART II for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common shares were exercised or con- verted into common shares. See Note 4 for further infor- mation. Common Stock Repurchases. We may repurchase shares of Yum China common stock under a program authorized by our board of directors from time to time in open market or privately negotiated transactions, includ- ing block trades, accelerated share repurchase transac- tions and the use of Rule 10b5-1 trading plans. Shares repurchased are included in treasury stock in the financial statements. Recently Adopted Accounting Pronouncements In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASC 842”), which increases trans- parency and comparability among organizations by rec- ognizing lease assets and lease liabilities on the balance leasing sheet and disclosing key information about arrangements. The FASB subsequently issued amend- ments to clarify the implementation guidance. The Com- pany adopted these standards on January 1, 2019, using a modified retrospective method for leases that exist at, or are entered into after, January 1, 2019, and has not recast the comparative periods presented in the Consolidated Financial Statements. Additionally, we elected the pack- age of practical expedients that allowed us to not reassess: (1) whether any expired or existing contracts are or con- tain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. We also elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases. Upon the adoption of ASC 842, the Company recognized ROU assets and lease liabilities of approximately $2.0 billion and $2.2 billion, respectively, for operating leases of the land and/or building of our restaurants and office spaces based on the present value of lease payments over the lease term. In addition, an impairment charge of $60 million (net of related impact on deferred taxes and noncontrolling interests) on ROU assets arising from existing operating leases as of January 1, 2019 was recorded as an adjustment to retained earnings, as the additional impairment charge would have been recorded before adoption had the operating lease ROU assets been recognized at the time of impairment. K - 0 1 m r o F 102 YUM CHINA – 2019 Form 10-K The following table summarizes the effect on the Consolidated Balance Sheets as a result of adopting ASC 842. December 31, 2018 Effect of adoption January 1, 2019 $ $ $ ASSETS Current Assets Cash and cash equivalents Short-term investments Accounts receivable, net Inventories, net Prepaid expenses and other current assets Total Current Assets Property, plant and equipment, net Operating lease right-of-use assets Goodwill Intangible assets, net Deferred income taxes Investments in unconsolidated affiliates Other assets Total Assets LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY Current Liabilities Accounts payable and other current liabilities Income taxes payable Total Current Liabilities Non-current operating lease liabilities Non-current finance lease liabilities Other liabilities Total Liabilities Redeemable Noncontrolling Interest Equity Common stock Treasury stock Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total Yum China Holdings, Inc. Stockholders’ Equity Noncontrolling interests Total Equity 1,266 122 80 307 177 1,952 1,615 — 266 116 89 81 491 $ (39)(a) (39) (1) 1,997(b) (2)(c) 19(d) (1) (4)(c) 4,610 $ 1,969 $ 1,199 54 1,253 — 25 355 1,633 1 4 (460) 2,402 944 (17) 2,873 103 2,976 $ 320(e) $ 320 1,860(f) — (148)(g) 2,032 (60)(h) (60) (3)(i) (63) Total Liabilities, Redeemable Noncontrolling Interest and Equity $ 4,610 $ 1,969 $ 1,266 122 80 307 138 1,913 1,614 1,997 266 114 108 80 487 6,579 1,519 54 1,573 1,860 25 207 3,665 1 4 (460) 2,402 884 (17) 2,813 100 2,913 6,579 F o r m 1 0 - K (a) Represents the current portion of prepaid rent reclassified to operating lease ROU assets. (b) (c) Represents the net result of capitalization of operating lease payments and reclassification of prepaid rent, initial direct cost, deferred rent accrual and lease incentives, and offset by impairment of operating lease ROU assets that existed prior to the date of adoption. Represents initial direct cost, favorable lease and non-current prepaid rent reclassified to operating lease ROU assets. (d) Represents the deferred tax impact related to impairment of operating lease ROU assets. (e) Represents recognition of the current portion of operating lease liabilities, offset by the reclassification of accrued rental payments and the current portion of deferred rent accrual to operating lease ROU assets. YUM CHINA – 2019 Form 10-K 103 PART II (f) Represents recognition of the non-current operating lease liabilities. (g) (h) Represents reclassification of the non-current portion of deferred rent accrual and lease incentives to operating lease ROU assets. Represents an impairment charge on operating lease ROU assets arising from existing operating leases as of January 1, 2019, net of related impact on deferred taxes and noncontrolling interests, with a corresponding reduc- tion to the carrying amount of operating lease ROU assets. The impairment charge was recorded for those restau- rants under operating leases with full impairment on the long-lived assets before January 1, 2019, as the additional impairment charge would have been recorded before January 1, 2019 had the operating lease ROU assets been recognized at the time of impairment. (i) Represents impairment of operating lease ROU assets attributable to noncontrolling interests. In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) and will improve the usefulness of information reported to financial statement users. ASU 2018-02 is effective for the Company from January 1, 2019, with early adoption permitted. We adopted the standard on January 1, 2019, and such adoption did not have a material impact on our financial statements. Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The new guidance largely aligns the accounting for share-based awards issued to employees and non-employees. Existing guidance for employee awards will apply to nonemployee share-based transactions with limited exceptions. The new guidance also clarifies that any share-based payment awards issued to customers should be evaluated under ASC 606, Revenue from Contracts with Customers. ASU 2018-07 is effective for the Company from January 1, 2019, with early adoption permitted. We adopted the standard on January 1, 2019, and such adoption did not have a mate- rial impact on our financial statements. In June 2018, Compensation—Stock Compensation the FASB issued ASU 2018-07, 718) (Topic K - 0 1 m r o F Note 3—Revenue The following table presents revenue disaggregated by types of arrangements and segments: KFC Pizza Hut All Other Segments 2019 Corporate and Unallocated Combined Elimination Consolidated Revenues Company sales Franchise fees and income Revenues from transactions with franchisees and unconsolidated affiliates Other revenues Total revenues $5,839 $ 136 2,045 $ 4 64 1 4 1 41 $ 8 28 81 — $ — 7,925 $ 148 558 4 654 87 $6,040 $ 2,054 $ 158 $ 562 $ 8,814 $ — $ — — (38) (38) $ 7,925 148 654 49 8,776 104 YUM CHINA – 2019 Form 10-K KFC Pizza Hut All Other Segments 2018 Corporate and Unallocated(a) Combined Elimination Consolidated Revenues Company sales Franchise fees and income Revenues from transactions with franchisees and unconsolidated affiliates Other revenues Total revenues $ 5,495 $ 132 2,106 $ 3 61 — 2 — 32 $ 6 26 51 — $ — 7,633 $ 141 514 3 603 54 $ 5,688 $ 2,111 $ 115 $ 517 $ 8,431 $ — $ — — (16) (16) $ 7,633 141 603 38 8,415 (a) As COFFii & JOY and our e-commerce business became operating segments starting from the first quarter of 2019, revenue by segment information for 2018 has been recast to align with the change in segment reporting. Additional details on our reportable segments are included in Note 17. KFC Pizza Hut All Other Segments Revenues Company sales Franchise fees and income Revenues from transactions with franchisees and unconsolidated affiliates Other revenues Total revenues $ 4,863 $ 134 2,090 $ 2 69 — 1 — 40 $ 5 25 36 $ 5,066 $ 2,093 $ 106 $ 2017 Corporate and Unallocated Combined Elimination Consolidated — $ — 6,993 $ 141 504 — 504 599 36 $ 7,769 $ — $ — — — — $ 6,993 141 599 36 7,769 Franchise Fees and Income Initial fees, including renewal fees Continuing fees and rental income Franchise fees and income Costs to Obtain Contracts 2019 2018 2017 $ $ 8 $ 140 148 $ 7 $ 134 141 $ 6 135 141 F o r m 1 0 - K Costs to obtain contracts consist of upfront franchise fees that we paid to YUM prior to the separation in relation to initial fees or renewal fees we received from franchisees and unconsolidated affiliates, as well as license fees that are payable to YUM in relation to our deferred revenue of prepaid stored-value products, privilege membership programs and customer loyalty programs. They meet the requirements to be capitalized as they are incremental costs of obtaining contracts with customers and the Company expects to generate future economic benefits from such costs incurred. Such costs to obtain contracts are included in Other assets in the Consolidated Balance Sheets and are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the assets relate. Subsequent to the separa- tion, we are no longer required to pay YUM initial or renewal fees that we receive from franchisees and unconsolidated affiliates. The Company did not incur any impairment losses related to costs to obtain contracts during any of the periods presented. Costs to obtain contracts were $9 million and $8 million at December 31, 2019 and 2018, respectively. YUM CHINA – 2019 Form 10-K 105 PART II Contract Liabilities Contract liabilities at December 31, 2019 and 2018 were as follows: Contract liabilities —Deferred revenue related to prepaid stored-value products —Deferred revenue related to upfront franchise fees —Deferred revenue related to customer loyalty programs —Deferred revenue related to privilege membership programs —Others Total 2019 2018 $ $ 86 $ 39 24 16 3 70 37 17 3 — 168 $ 127 Contract liabilities primarily consist of deferred revenue related to prepaid stored-value products, privilege membership programs, customer loyalty programs and upfront franchise fees. Deferred revenue related to prepaid stored-value prod- ucts, privilege membership programs, and customer loyalty programs is included in Accounts payable and other current liabilities in the Consolidated Balance Sheets. Deferred revenue related to upfront franchise fees that we expect to recog- nize as revenue in the next 12 months is included in Accounts payable and other current liabilities, and the remaining bal- ance is included in Other liabilities in the Consolidated Balance Sheets. Revenue recognized that was included in the contract liability balance at the beginning of the year amounted to $68 million and $46 million in 2019 and 2018, respec- tively. Changes in contract liability balances were not materially impacted by business acquisition, change in estimate of transaction price or any other factors during any of the years presented. The Company has elected, as a practical expedient, not to disclose the value of remaining performance obligations asso- ciated with sales-based royalty promised to franchisees in exchange for franchise right and other related services. The remaining duration of the performance obligation is the remaining contractual term of each franchise agreement. We recognize continuing franchisee fees and revenues from advertising services and other services provided to franchisees and unconsolidated affiliates based on certain percentage of sales, as those sales occur. K - 0 1 m r o F Note 4—Earnings Per Common Share (“EPS”) The following table summarizes the components of basic and diluted earnings per share (in millions, except for per share data): Net Income—Yum China Holdings, Inc. Weighted-average common shares outstanding (for basic calculation)(a) Effect of dilutive share-based awards(a) Effect of dilutive warrants(b) Weighted-average common and dilutive potential common shares outstanding (for diluted calculation) Basic Earnings Per Share Diluted Earnings Per Share Share-based awards and warrants excluded from the diluted EPS computation(c) 2019 2018 2017 $ 713 $ 708 $ 377 8 3 388 1.89 $ 1.84 $ 2 384 9 2 395 1.84 $ 1.79 $ 6 $ $ 398 387 10 1 398 1.03 1.00 10 (a) As a result of the separation, shares of Yum China common stock were distributed to YUM’s shareholders of record as of October 19, 2016 and included in the calculated weighted-average common shares outstanding. Holders of outstanding YUM equity awards generally received both adjusted YUM awards and Yum China 106 YUM CHINA – 2019 Form 10-K awards, or adjusted awards of either YUM or Yum China in their entirety. Any subsequent exercise of these awards, whether held by the Company’s employees or YUM’s employees, would increase the number of com- mon shares outstanding. The incremental shares arising from outstanding equity awards are included in the com- putation of diluted EPS, if there is dilutive effect. See Note 14 for a further discussion of share-based compensation. (b) Pursuant to the investment agreements dated September 1, 2016 (Note 10), Yum China issued to strategic inves- tors two tranches of warrants on January 9, 2017, with each tranche initially providing the right to purchase 8,200,405 shares of Yum China common stock, at an initial exercise price of $31.40 and $39.25 per share, respec- tively, subject to customary anti-dilution adjustments. The warrants may be exercised at any time through October 31, 2021. The incremental shares arising from outstanding warrants are included in the computation of diluted EPS, if there is dilutive effect when the average market price of Yum China common stock for the year exceeds the applicable exercise price of the warrants. (c) These outstanding employee stock options, stock appreciation rights, RSUs, PSUs and warrants were not included in the computation of diluted EPS because to do so would have been antidilutive for the years presented. Note 5—Items Affecting Comparability of Net Income and Cash Flows Gain from re-measurement of equity interest upon acquisition In the first quarter of 2018, the Company completed the acquisition of Wuxi KFC. In connection with the acquisi- tion, the Company also recognized a gain of $98 million from the re-measurement of our previously held 47% equity interest at fair value using discounted cash flow valuation approach and incorporating assumptions and estimates that are not observable in the market. Key assumptions used in estimating future cash flows included projected revenue growth and operating expenses, which were based on internal projections, historical performance of stores, and the business environment, as well as the selection of an appropriate discount rate based on weighted-average cost of capital and company-specific risk premium. The gain was not allocated to any segment for performance reporting purposes. Meituan Dianping (“Meituan”) investment The Company subscribed for 8 million, or less than 1%, of the ordinary shares of Meituan, an e-commerce plat- form for services in China, for a total consideration of approximately $74 million, when it launched its initial public offering on the Hong Kong Stock Exchange in September 2018. The Company accounted for the equity securities at fair value with subsequent fair value changes recorded in our Consolidated Statements of Income. The fair value of the investment in Meituan is determined based on the closing market price for the shares at the end of each reporting period. The related unrealized gain of $63 million and unrealized loss of $27 million was included in Investment gain or loss in our Consolidated Statements of Income for the years ended December 31, 2019 and 2018, respectively. Daojia impairment During the years ended December 31, 2019 and 2018, we recorded impairment charges of $2 million and $12 million, respectively, on the intangible assets acquired from the Daojia business primarily attributable to its plat- form. Additionally, during the year ended December 31, 2019, goodwill related to Daojia reporting unit was fully impaired, resulting in an impairment charge of $9 million. The fair values of Daojia intangible assets and reporting unit were based on the estimated price a willing buyer would pay, using unobservable inputs (level 3). The fair values of intangible assets were determined using a relief- from-royalty valuation approach, with estimated future sales and royalty rates as significant inputs. The fair value of the reporting unit was determined using an income F o r m 1 0 - K YUM CHINA – 2019 Form 10-K 107 PART II approach with future cash flow estimates supported by estimated future sales and margin. Both valuation approaches incorporated a selection of an appropriate dis- count rate based on weighted-average cost of capital and company-specific risk premium. For the years ended December 31, 2019 and 2018, these non-cash impairment charges totaling $11 million and $12 million, respectively, were included in Closures and impairment expenses in our Consolidated Statements of Income, but were not allocated to any segment for perfor- mance reporting purposes. We recorded tax benefit of $1 million and $3 million associated with the impairment, respectively, and allocated $2 million and $1 million of Income— the after-tax impairment charge to Net noncontrolling interests, respectively, which resulted in a net impairment charge of $8 million and $8 million allo- cated to Net Income—Yum China Holdings, Inc., respectively, for the years ended December 31, 2019 and 2018. Income Taxes to related primarily $5 million The Company recorded $164 million as an additional income tax expense in the fourth quarter of 2017, the period in which the Tax Act was enacted. It includes an estimated one-time transition tax of $130 million on the deemed repatriation of accumulated undistributed foreign the earnings, re-measurement of certain deferred tax assets based on the rates at which they are expected to reverse in the future, and the valuation allowance of $30 million for certain deferred tax assets. We completed our analysis of the Tax Act in the fourth quarter of 2018 according to guidance released by the U.S. Treasury Department and IRS as of December 2018 and made an adjustment of $36 million to reduce the provisional amount for transition tax recorded in 2017 accordingly. 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 an additional income tax expense of $8 million for the transition tax accordingly. Note 6—Other Income, net Equity income from investments in unconsolidated affiliates Gain from re-measurement of equity interest upon acquisition(a) Foreign exchanges and other Other income, net 2019 2018 2017 69 $ — (9) 60 $ 65 $ 98 (11) 152 $ 65 — (1) 64 $ $ (a) As a result of the acquisition of Wuxi KFC in the first quarter of 2018, as disclosed in Note 5, the Company recog- nized a gain of $98 million from the re-measurement of our previously held 47% equity interest at fair value, which was not allocated to any segment for performance reporting purposes. K - 0 1 m r o F Note 7—Supplemental Balance Sheet Information Accounts Receivable, net Accounts receivable, gross Allowance for doubtful accounts Accounts receivable, net Prepaid Expenses and Other Current Assets Receivables from payment processors and aggregators Prepaid rent Dividends receivable from unconsolidated affiliates Other prepaid expenses and current assets Prepaid expenses and other current assets 108 YUM CHINA – 2019 Form 10-K 2019 2018 89 $ (1) 88 $ 81 (1) 80 2019 2018 41 $ 2 8 83 49 42 20 66 134 $ 177 $ $ $ $ Property, Plant and Equipment Buildings and improvements Finance leases, primarily buildings Machinery and equipment and construction in progress Property, plant and equipment, gross Accumulated depreciation Property, plant and equipment, net $ 2019 2,159 $ 30 1,282 3,471 (1,877) $ 1,594 $ 2018 2,121 26 1,201 3,348 (1,733) 1,615 Depreciation and amortization expense related to property, plant and equipment was $408 million, $414 million and $391 million in 2019, 2018 and 2017, respectively. Other Assets VAT assets Land use right Investment in equity securities Long-term deposits Costs to obtain contracts Restricted cash Others Other Assets 2019 2018 243 $ 133 110 71 9 9 5 580 $ 226 138 47 64 8 — 8 491 $ $ Amortization expense related to land use right was $4 million, $5 million and $4 million in 2019, 2018 and 2017, respec- tively. Accounts Payable and Other Current Liabilities Accounts payable Operating leases liabilities Accrued compensation and benefits Accrued capital expenditures Contract liabilities Accrued marketing expenses Other current liabilities Accounts payable and other current liabilities Other Liabilities Accrued income tax payable Deferred income tax liabilities Contract liabilities Deferred rental accrual Other noncurrent liabilities Other liabilities 2019 623 382 223 150 135 64 114 1,691 2018 $ 619 — 200 137 96 32 115 $1,199 2019 2018 69 $ 67 33 — 41 210 $ 71 65 31 144 44 355 $ $ $ $ F o r m 1 0 - K Reconciliation of Cash, Cash equivalents, and Restricted Cash for Consolidated Statements of Cash Flows Cash and cash equivalents as presented in Consolidated Balance Sheets Restricted cash included in Other assets(a) Cash, Cash Equivalents and Restricted Cash as presented in Consolidated Statements of Cash Flows 2019 1,046 $ 9 1,055 $ 2018 1,266 — 1,266 $ $ (a) Restricted cash included in Other assets within our Consolidated Balance Sheet represents amounts deposited into an escrow account pursuant to a definitive agreement entered in August 2019 to acquire a controlling interest in the Huang Ji Huang group, a leading Chinese-style casual dining franchise business. Subject to the satisfaction of closing conditions, the acquisition is expected to close in the first half of 2020. The acquisition is considered immaterial. YUM CHINA – 2019 Form 10-K 109 PART II Note 8—Goodwill and Intangible Assets The changes in the carrying amount of goodwill are as follows: Balance as of December 31, 2017 Goodwill, gross Accumulated impairment losses(a) Goodwill, net Goodwill acquired(b) Effect of currency translation adjustment and other Balance as of December 31, 2018 Goodwill, gross Accumulated impairment losses(a) Goodwill, net Goodwill impairment(c) Effect of currency translation adjustment and other Balance as of December 31, 2019 Goodwill, gross Accumulated impairment losses Goodwill, net Total Company KFC Pizza Hut All Other Segments $ 490 $ (382) 80 $ — 19 $ — 108 175 (17) 648 (382) 266 (9) (3) 645 (391) 80 175 (17) 238 — 238 — (3) 235 — 19 — — 19 — 19 — — 19 — $ 254 $ 235 $ 19 $ 391 (382) 9 — — 391 (382) 9 (9) — 391 (391) — K - 0 1 m r o F (a) Accumulated impairment losses represent Little Sheep goodwill related impairment. (b) Goodwill acquired resulted from the acquisition of Wuxi KFC. (Note 1). (c) In 2019, we recorded an impairment charge of $9 million on goodwill attributable to the Daojia reporting unit (Note 5). Intangible assets, net as of December 31, 2019 and 2018 are as follows: 2019 2018 Gross Carrying Amount(a) Accumulated Amortization Accumulated Impairment Losses(b) Net Carrying Amount Gross Carrying Amount Accumulated Amortization Accumulated Impairment Losses(b) Net Carrying Amount Finite-lived intangible assets Reacquired franchise rights Daojia platform Customer-related assets Others(c) Indefinite-lived intangible assets Little Sheep trademark Total intangible assets $ $ $ $ 148 $ 16 12 9 (113) $ (4) (8) (4) — $ (12) 35 $ — 150 $ 16 (2) — 2 5 12 17 (100) $ (3) (8) (9) 185 $ (129) $ (14) $ 42 $ 195 $ (120) $ — $ (10) (2) — (12) $ 50 3 2 8 63 52 $ 237 $ — $ (129) $ — $ (14) $ 52 $ 94 $ 53 $ 248 $ — $ (120) $ — $ (12) $ 53 116 (a) Changes in gross carrying amount include effect of currency translation adjustment. (b) In 2019 and 2018, we recorded impairment charges of $2 million and $12 million on intangible assets acquired from Daojia primarily attributable to the Daojia platform, respectively. See Note 5 for details. 110 YUM CHINA – 2019 Form 10-K (c) Decrease in Others in 2019 is primarily due to the reclassification of favorable lease assets, with a gross value of $7 million and accumulated amortization of $5 million, to right-to-use assets upon adoption of ASC 842. Amortization expense for finite-lived intangible assets was $16 million in 2019, $26 million in 2018 and $14 million in 2017. Amortization expense for finite-lived intangible assets is expected to approximate $12 million in 2020, $12 million in 2021, $12 million in 2022, $2 million in 2023 and $1 million in 2024. Note 9—Credit Facilities As of December 31, 2019, the Company had credit facili- ties of RMB2,893 million (approximately $415 million), comprised of RMB1,500 million (approximately $215 million) in the aggregate and offshore credit facilities of $200 million in the aggregate. facilities onshore credit of The credit facilities had remaining terms ranging from less than one year to three years as of December 31, 2019. Each credit facility bears interest based on the prevailing rate stipulated by the People’s Bank of China, Loan Prime Rate (“LPR”) published by the National Interbank Fund- ing Centre of the PRC or London Interbank Offered Rate (“LIBOR”) administered by the ICE Benchmark Admin- istration. Each credit facility contains a cross-default pro- vision whereby our failure to make any payment on a is due at principal amount from any credit facility will constitute a default on other credit facilities. Some of the credit facili- ties contain covenants limiting, among other things, cer- tain additional indebtedness and liens, and certain other transactions specified in the respective agreement. Interest on any outstanding borrowings least monthly. Some of the onshore credit facilities contain sub- limits for overdrafts, non-financial bonding, standby let- ters of credit and guarantees. As of December 31, 2019, we had outstanding bank guarantees of RMB 85 million (approximately $12 million) to secure our lease payment to landlords for certain Company-owned restaurants. The credit facilities were therefore reduced by the same amount, while there were no borrowings outstanding as of December 31, 2019. F o r m 1 0 - K Note 10—Investment Agreements with Strategic Investors together with Primavera, On September 1, 2016, YUM and the Company entered into investment agreements (the “Investment Agree- ments”) with each of Pollos Investment L.P., an affiliate of Primavera Capital Group (“Primavera”), and API (Hong Kong) Investment Limited, an affiliate of Zhejiang Ant Small and Micro Financial Services Group Co., Ltd. (“Ant Financial” and, the “Investors”). Pursuant to the Investment Agreements, on November 1, 2016 (“Closing Date”), Primavera and Ant Financial invested $410 million and $50 million, respec- tively, for a collective $460 million investment (the “Investment”) in the Company in exchange for: (i) shares of Yum China common stock representing in the aggre- gate 5% of Yum China common stock issued and out- standing immediately following the separation subject to Post-Closing Adjustment for a final aggregate ownership of between 4.3% and 5.9% in Yum China and (ii) two tranches of warrants (the “Warrants”), exercisable for an approximate additional 4% ownership, in the aggregate, of Yum China common stock issued and outstanding after the separation, taking into account the shares previously issued to the Investors. Immediately before the closing of the Investment, Yum China had 363,758,219 shares of common stock issued and outstanding, with a par value US$0.01 per share. Pursuant to the Investment Agree- ments, on November 1, 2016, Yum China issued 17,064,172.74 and 2,080,996.68 shares of common stock (the “Closing Shares”) at US$24.03 per share (“Closing Price”) to Primavera and Ant Financial, respectively, sub- ject to adjustment as described below. Pursuant to the Investment Agreements, the Investors and the Company determined the volume weighted-average trading price (“VWAP”) per share of Company common YUM CHINA – 2019 Form 10-K 111 PART II stock over the trading days occurring over the period from December 1, 2016 to December 30, 2016 (the “Measure- ment Period”), and discounted such VWAP by 8% (the “Adjusted VWAP Price Per Share”). Since the Adjusted VWAP Price Per Share of $25.05 exceeded the Closing Price of US$24.03 paid by the Investors at the Closing Date, on January 9, 2017, the Company repurchased from Primavera and Ant Financial 699,394.74 and 85,291.68 shares of common stock, respectively, at par value of $0.01 per share, based on the Adjusted VWAP Price Per Share as determined on December 30, 2016. The repurchased shares were included in Treasury Stock as of December 31, 2016 in the Consolidated Financial Statements. In addition, pursuant to the terms of the Investment Agreements, on January 9, 2017, Yum China issued to each of the Investors two tranches of Warrants. Upon exercise, the first tranche of Warrants initially provided Primavera and Ant Financial with the right to purchase 7,309,057 and 891,348 shares of Yum China common stock, respectively, at an initial exercise price of $31.40 per share. The second tranche of Warrants initially pro- vided Primavera and Ant Financial with the right to pur- chase the same number of shares of Yum China common stock purchasable by Primavera and Ant Financial under the first tranche of Warrants, at an initial exercise price of $39.25 per share. The initial exercise price for the War- rants was based on $12 billion and $15 billion for the first Note 11—Leases K - 0 1 m r o F tranche and second tranche, respectively, divided by the number of shares of common stock, including the Closing Shares after the Post-Closing Adjustment, issued and out- standing as of the Closing Date. The Warrants may be exercised at any time through October 31, 2021 and con- tain customary anti-dilution protections. As a result of the issuance of the Closing Shares and the Post-Closing Adjustment (excluding shares issuable upon exercise of the Warrants), Primavera and Ant Financial collectively beneficially owned approximately 4.8% of the outstanding shares of Yum China common stock as of January 9, 2017, or approximately 8.7% of the outstand- ing shares of Yum China common stock as of January 9, 2017 assuming the full exercise of both tranches of War- rants by each of the Investors. Total cash proceeds of $460 million from the closing of the Investment were first allocated to the Post-Closing Adjustment and Warrants based on their fair value on November 1, 2016, with the residual value of $364 million allocated to the shares of common stock issued. In October and November 2019, Primavera entered into pre-paid forward sale transactions with several financial institutions (the “Dealers”), pursuant to which Primavera is obligated to deliver to the Dealers all of its second tranche of Warrants. As of December 31, 2019, we operated over 7,300 company-owned restaurants, leasing the underlying land and/or building. We generally enter into lease agreements for our restaurants with initial terms of 10 to 20 years. Most of our lease agreements contain termination options that permit 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. Such options are accounted for only when it is reasonably certain that we will exercise the options. 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 sales; or (iii) a percentage of the restaurant’s sales. Most leases require us to pay common area maintenance fees for the leased property. In addition to restaurants leases, we also lease office spaces, logistics centers and equipment. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. In limited cases, we sub-lease certain restaurants to franchisees in connection with refranchising transactions or lease our properties to other third parties. The lease payments under these leases are generally based on the higher of a fixed base 112 YUM CHINA – 2019 Form 10-K rent or a percentage of the restaurant’s annual sales. Income from sub-lease agreements with franchisees or lease agree- ments with other third parties are included in Franchise fees and income and Other revenue, respectively, within our Consolidated Statements of Income. The impact of ASC 842 on our accounting as a lessor was not significant. Supplemental Balance Sheet 12/31/2019 Account Classification Assets Operating lease right-of-use assets Finance lease right-of-use assets Total leased assets Liabilities Current Operating lease liabilities Finance lease liabilities Non-current Operating lease liabilities Finance lease liabilities Total lease liabilities Summary of Lease Cost Operating lease cost Finance lease cost Amortization of leased assets Interest on lease liabilities Variable lease cost Short-term lease cost Sub-lease income Total lease cost $ $ $ $ $ $ 1,985 Operating lease right-of-use assets 18 Property, plant and equipment, net 2,003 382 Accounts payable and other current liabilities 2 Accounts payable and other current liabilities 1,803 Non-current operating lease liabilities 26 Non-current finance lease liabilities 2,213 Year Ended 12/31/2019 Account Classification 472 Occupancy and other operating expenses, G&A or Franchise expenses 1 Occupancy and other operating expenses 2 Interest expense, net 325 Occupancy and other operating expenses or Franchise expenses 10 Occupancy and other operating expenses or G&A (27) Franchise fees and income or Other revenues 783 Supplemental Cash Flow Information Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases Operating cash flows from finance leases Financing cash flows from finance leases Right-of-use assets obtained in exchange for new lease liabilities(a): Operating leases Finance leases Year Ended 12/31/2019 $ $ 481 1 2 346 4 F o r m 1 0 - K (a) This supplemental non-cash disclosure for ROU obtained in exchange for new lease liabilities also includes non- cash transactions resulting in adjustments to the lease liability or ROU asset due to modification or other reassess- ment events. Lease Term and Discount Rate Weighted-average remaining lease term (years) Operating leases Finance leases Weighted-average discount rate Operating leases Finance leases 12/31/2019 7.1 11.5 6.1% 5.9% YUM CHINA – 2019 Form 10-K 113 PART II Summary of Future Lease Payments and Lease Liabilities Maturities of lease liabilities as of December 31, 2019 were as follows: 2020 2021 2022 2023 2024 Thereafter Total undiscounted lease payment Less: imputed interest(b) Present value of lease liabilities Amount of Operating Leases Amount of Finance Leases Total $ $ 504 448 389 325 261 781 2,708 523 2,185 $ $ 4 4 4 3 3 21 39 11 28 $ $ 508 452 393 328 264 802 2,747 534 2,213 (b) As the rate implicit in the lease cannot be readily determined, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the imputed interest and present value of lease payments. We used the incremental borrowing rate on January 1, 2019 for operating leases that commenced prior to that date. As of December 31, 2019, we have additional lease agreements that have been signed but not yet commenced, with total undiscounted minimum lease payments of $84 million. These leases will commence between 2020 and 2023 with lease terms of 1 year to 20 years. Future minimum lease payments under non-cancellable leases as of December 31, 2018 were as follows: 2019 2020 2021 2022 2023 Thereafter K - 0 1 m r o F Amount of Operating Leases Commitments Amount of Finance Leases Total $ $ $ 466 440 394 336 275 864 2,775 $ 3 3 3 3 3 22 37 $ $ 469 443 397 339 278 886 2,812 At December 31, 2018, the present value of minimum payments under finance leases was $27 million, after deducting imputed interest of $10 million. The current portion of finance lease obligations was $2 million as of December 31, 2018, and was classified in Accounts payable and other current liabilities. Note 12—Fair Value Measurements and Disclosures The Company’s financial assets and liabilities primarily consist of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and lease liabilities, and the carrying values of these assets and liabilities approxi- mate their fair value in general. The Company accounts for its investment in the equity securities of Meituan at fair value, 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. 114 YUM CHINA – 2019 Form 10-K The following table is a summary of our financial assets measured on a recurring basis or disclosed at fair value and the level within the fair value hierarchy in which the measurement falls. The Company classifies its cash equivalents, short- term investments and investment in equity securities within Level 1 or Level 2 in the fair value hierarchy because it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value, respectively. No transfers among the levels within the fair value hierarchy occurred in 2019 and 2018. Cash equivalents: Time deposits Money market funds Total cash equivalents Short-term investments: Time deposits Total short-term investments Other assets: Investment in equity securities Total Cash equivalents: Time deposits Money market funds Fixed income debt securities(a) Total cash equivalents Short-term investments: Time deposits Total short-term investments Other assets: Investment in equity securities Total Balance at December 31, 2019 Fair Value Measurement or Disclosure at December 31, 2019 Level 1 Level 2 Level 3 407 331 738 611 611 110 1,459 $ $ 331 331 407 407 611 611 — 110 441 $ 1,018 $ — Balance at December 31, 2018 Fair Value Measurement or Disclosure at December 31, 2018 Level 1 Level 2 Level 3 $ $ $ 570 226 153 949 122 122 47 $ — $ 570 $ 226 153 379 — 47 426 570 122 122 $ 692 $ $ 1,118 $ — — — — F o r m 1 0 - K (a) Classified as held-to-maturity investments and measured at amortized cost. Non-recurring fair value measurements In addition, certain of the Company’s restaurant-level assets (including operating lease ROU assets, property, plant and equipment), goodwill and intangible assets, are measured at fair value based on unobservable inputs (Level 3) on a non-recurring basis, if determined to be impaired. The following table presents amounts recognized from all non-recurring fair value measurements based on unobservable inputs (Level 3) during the years ended December 31, 2019, 2018 and 2017. These amounts exclude fair value measure- ments made for restaurants that were subsequently closed or refranchised prior to those respective year-end dates. 2019 2018 2017 Account Classification ROU impairment prior to the adoption of ASC 842(a) Restaurant-level impairment(b) Daojia impairment(c) Income from the reversal of contingent consideration(d) Total $ $ 82 $ 28 11 — 121 $ — $ 27 12 — 39 $ — Retained Earnings 41 Closure and impairment expenses, net — Closure and impairment expenses, net (3) Other income, net 38 YUM CHINA – 2019 Form 10-K 115 PART II (a) (b) ROU impairment prior to the adoption of ASC 842 represents an impairment charge on operating lease ROU assets arising from existing operating leases as of January 1, 2019. After netting with the related impact on deferred taxes of $19 million and the impact on noncontrolling interests of $3 million, we recorded a cumulative adjustment of $60 million to retained earnings in accordance with the transition guidance for the new lease stan- dard. For those restaurants under operating leases with full impairment on their long-lived assets (primarily prop- erty, plant and equipment) before January 1, 2019, an additional impairment charge would have been recorded before January 1, 2019 had the operating lease ROU assets been recognized at the time of impairment. Restaurant-level impairment charges are recorded in Closures and impairment expenses, net and resulted primar- ily from our semi-annual impairment evaluation of long-lived assets of individual restaurants that were being operated at the time of impairment and had not been offered for refranchising. We also performed an additional impairment evaluation upon adoption of ASC 842 in the first quarter of 2019. The remaining net book value of assets measured at fair value during the years ended December 31, 2019, 2018 and 2017 was insignificant. (c) See Note 5 for further discussion. (d) During 2017, we recognized income of $3 million from the reversal of contingent consideration previously recorded for a business combination (Level 3), as the fair value of such contingent consideration is considered to be nil given the remote likelihood of the payment obligation. K - 0 1 m r o F Note 13—Retirement Plans For executives who were hired or re-hired after September 30, 2001, YUM has implemented the YUM LRP. This is an unfunded, unsecured account-based retire- ment plan which allocates a percentage of pay to an account payable to the executive following the executive’s separa- tion of employment from YUM or attainment of age 55. The Company adopted the YCHLRP upon separation while the assets and liabilities associated with these employees under YUM LRP were transferred to YCHLRP. YCHLRP will continue to be in effect until ter- minated by the Company’s board of directors. The terms of the YCHLRP are substantially similar to the terms of the YUM LRP. Under the YCHLRP, certain executives who are at least age 21, who are classified as salary level 12, who are not eligible to participate in a tax-qualified defined ben- efit plan, and who satisfy certain additional requirements as to work location and assignment, are eligible to participate in the YCHLRP if selected for participation by the Com- pany. The YCHLRP is an unfunded, unsecured account- based retirement plan that allocates a percentage of pay to an account payable to an executive following the later to occur of the executive’s separation of employment from the Company or attainment of age 55. Under the YCHLRP, participants aged 55 or older are entitled to a lump sum dis- 116 YUM CHINA – 2019 Form 10-K tribution of their account balance on the last day of the cal- endar quarter that occurs on or follows their separation of employment. The liabilities of $4.8 million and $4.4 million attributable to our employees under the YCHLRP as of December 31, 2019 and 2018, respectively, are included in our Consolidated Balance Sheets. YUM offers certain of the Company’s executives working in China retirement benefits under the Bai Sheng Restau- rants China Holdings Limited Retirement Scheme (previ- ously known as the Bai Sheng Restaurants (Hong Kong) Ltd. Retirement Scheme). Under this defined contribution plan, YUM provides a company funded contribution rang- ing from 5% to 10% of an executive’s base salary. Upon termination, participants will receive a lump sum equal to a percentage of the Company’s contributions inclusive of investment return. This percentage is based on a vesting schedule that provides participants with a vested 30% interest upon completion of a minimum of 3 years of ser- vice, and an additional 10% vested interest for each addi- tional completed year, up to a maximum of 100%. The Company adopted the same plan after the separation and the contribution amount to the plan for the years ended December 31, 2019, 2018 and 2017 was insignificant. As stipulated by Chinese state regulations, the Company participates in a government-sponsored defined contribu- tion retirement plan. Substantially all employees are enti- tled to an annual pension equal to a fixed proportion of the average basic salary amount of the geographical area of their last employment at their retirement date. We are required to make contributions to the local social security bureau between 12% and 20% of the previous year’s average basic salary amount of the geographical area where the employees are under our employment. Contri- butions are recorded in the Consolidated Statements of Income as they become payable. We have no obligation for the payment of pension benefits beyond the annual contributions as set out above. The Company contributed $160 million, $174 million and $157 million to the government-sponsored plan for 2019, 2018 and 2017, respectively. Note 14—Share-Based Compensation Overview Upon the separation, holders of outstanding YUM equity awards generally received both adjusted YUM awards and Yum China awards, or adjusted awards of either YUM or Yum China in their entirety, to maintain the pre-separation intrinsic value of the awards. Depending on the tax laws of the country of employment, awards were modified using either the shareholder method or the employer method. Share issuances for Yum China awards held by YUM’s employees will be satisfied by Yum China. Share issuances for YUM awards held by the Company’s employees will be satisfied by YUM. The shareholder method was based on the premise that employees holding YUM awards prior to the separation should receive an equal number of awards of both YUM and Yum China. Under the employer method, employees holding YUM awards prior to the separation had their awards converted into awards of the company that they worked for subsequent to the separation. As a result, Yum China may issue shares of common stock to YUM’s employees upon exercise or vesting of various types of including stock options, SARs, RSUs, and awards, awards from the executive income deferral plan. The modified equity awards have the same terms and conditions as the awards held immediately before the sep- aration, except that the number of shares and the price were adjusted. In accordance with ASC 718, the Com- pany compared the fair value of the awards immediately prior to the separation to the fair value immediately after the separation to measure the incremental compensation cost, using the Black-Scholes option-pricing model (the “BS model”). The incremental compensation cost was insignificant, and YUM and the Company continue to recognize the unamortized original grant-date fair value of the modified awards over the remaining requisite ser- vice period as their respective employees continue to pro- the vide services. Share-based compensation for Company’s employees is based on both YUM awards and Yum China awards held by those employees. Effective October 31, 2016, the Company adopted the Yum China Holdings, Inc. Long Term Incentive Plan (the “2016 Plan”). The Company has reserved for issuance under the 2016 Plan of 45,000,000 shares of our common stock. Under this plan, the exercise price of stock options and SARs granted must be equal to or greater than the fair market value of the Company’s stock on the date of grant. F o r m 1 0 - K Potential awards to employees and non-employee direc- tors under the 2016 Plan include stock options, incentive options, SARs, restricted stock, stock units, RSUs, per- formance shares, performance units, and cash incentive awards. We have issued only stock options, SARs, RSUs and PSUs under the 2016 Plan. While awards under the 2016 Plan can have varying vesting provisions and exer- cise periods, outstanding awards under the 2016 Plan vest in periods ranging from three to five years. Stock options and SARs expire ten years after grant. The Company recognizes all share-based payments to employees and non-employee directors in the Consoli- dated Financial Statements as compensation cost on a straight-line basis over the service period based on their fair value on the date of grant, for awards that actually vest and when performance conditions are probable of being achieved, if applicable. If no substantive service condition YUM CHINA – 2019 Form 10-K 117 PART II exists, the grant-date fair value is fully recognized as expense upon grant. Certain awards are subject to specific retirement conditions, which allow the awards to fully vest as long as the employee is actively employed for at least one year following the grant date, provides at least six months notification of intention to retire, and signs non-solicitation and non-compete agreements. Under such circumstances, the grant-date fair value of the award is recognized as expense on a straight-line basis over the one-year service period from the grant date. Award Valuation The Company estimated the fair value of each stock option and SAR award granted to the Company’s employees as of the date of grant, using the BS model with the following assumptions: Risk-free interest rate Expected term (years) Expected volatility Expected dividend yield Share option and SAR awards granted to employees typi- cally have a graded vesting schedule of 25% per year over four years and expire 10 years after grant. The Company uses a single weighted-average term for awards that have a graded vesting schedule. Based on analysis of the his- torical exercise and post-vesting termination behavior, the Company determined that employees exercised the awards on average after 6.5 years. Forfeitures were esti- mated based on historical experience. Historical data used to estimate the expected term and forfeiture rate were based on data associated with the Company’s employees who were granted share-based awards by YUM prior to the separation. For those awards granted by the Company after the sepa- ration, the Company considered the volatility of common shares of comparable companies in the same business as the Company. The Company initially had no plan to pay dividends at the time of the grant. On October 4, 2017, the board of directors approved a regular quarterly cash divi- dend program, and declared an initial cash dividend of $0.10 per share on Yum China’s common stock. In 2019 and 2018, the dividend yield was estimated based on the Company’s dividend policy at the time of the grant. RSU awards generally vest over a three-year period with a majority of the awards cliff vesting at 100% on the third grant anniversary. The fair values of RSU awards are based on the closing price of the Company’s stock on the date of grant. K - 0 1 m r o F 118 YUM CHINA – 2019 Form 10-K 2019 2.5% 6.50 32.0% 1.2% 2018 2.5% 6.50 33.0% 1.0% 2017 1.9% 6.75 34.0% 0.0% During 2019 and 2018, the Company granted PSUs that are subject to market conditions and service conditions, cliff vesting at the end of the performance period. The number of shares to be distributed is based on the Compa- ny’s performance on its total shareholder return relative to its peer group in the MSCI International China Index, measured over a three-year performance period. The fair value of PSU awards was valued based on the outcome of the Monte-Carlo Simulation model (the “MCS model”) and amortized on a straight-line basis over the three-year period. The total amount of fair value for the PSUs granted in 2019 and 2018 is immaterial. Commencing from November 11, 2016, Yum China also granted annual awards of common stock to non-employee directors for their service on Yum China’s board of direc- tors. The fair value of these awards is based on the closing price per share of the Company’s common stock on the date of grant. The shares were issued outright to the direc- tors on the date of grant, with no conditions attached. Therefore, the fair value of the awards was fully recog- nized as expenses upon grant. For the years ended December 31, 2019 and 2018, a total of 60,419 and 45,425 shares of Yum China common stock, respectively, were granted to non-employee directors and the grant- date fair value of $2.4 million and $1.8 million, respec- tively, was immediately recognized in full in the Consolidated Statements of Income. Award Activity Stock Options and SARs Shares (in thousands) Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in millions) Outstanding at the beginning of 2019 Granted Exercised Forfeited or expired Outstanding at the end of 2019 Exercisable at the end of 2019 17,670 1,469 (4,234) (532) 14,373(a) 10,583 21.18 41.66 16.58 32.02 24.22 20.92 5.11 4.15 342 287 (a) Outstanding awards include 497,480 stock options and 13,875,168 SARs with weighted-average exercise prices of $18.50 and $24.42, respectively. Outstanding awards represent Yum China awards held by employees of both the Company and YUM. The weighted-average grant-date fair value of SARs granted in 2019, 2018 and 2017 was $13.43, $13.52 and $10.19, respectively. The total intrinsic value of stock options and SARs exercised by the Company’s employees during the years ended December 31, 2019, 2018 and 2017 was $39 million, $31 million and $44 million, respectively. As of December 31, 2019, $25 million of unrecognized compensation cost related to unvested stock options and SARs, which will be reduced by any forfeitures that occur, is expected to be recognized over a remaining weighted-average vesting period of approximately 1.70 years. This reflects unrecognized cost for both Yum China awards and YUM awards held by the Company’s employees. The total fair value at grant date or modification date of awards held by the Company’s employees that vested during 2019, 2018 and 2017 was $14 million, $14 million and $11 million, respec- tively. RSUs and PSUs Unvested at the beginning of 2019 Granted Vested Forfeited Unvested at the end of 2019 F o r m 1 0 - K Shares (in thousands) Weighted-Average Grant Date Fair Value 988 332 (219) (130) 971 30.60 44.75 24.11 36.76 36.08 The weighted-average grant-date fair value of RSUs and PSUs granted in 2019, 2018 and 2017 was $44.75, $39.50 and $28.46, respectively. As of December 31, 2019, $16 million of unrecognized compensation cost related to 970,762 unvested RSUs and PSUs, which will be reduced by any forfeiture that occurs, is expected to be recognized over a remaining weighted-average vesting period of approximately 1.70 years. Impact on Net Income Share-based compensation expense was $26 million, $24 million and $26 million for 2019, 2018 and 2017, respectively. Deferred tax benefits of $1 million, $1 million, $3 million was recognized in 2019, 2018 and 2017, respectively. YUM CHINA – 2019 Form 10-K 119 PART II Note 15—Equity Immediately after the separation on October 31, 2016, Yum China authorized capital stock consisted of 1,000 million shares of common stock, par value $0.01 per share, and 364 million shares of Yum China common stock were issued and outstanding. As of December 31, 2019, 395 million shares of Yum China common stock were issued and 376 million shares were outstanding. On October 27, 2016, a duly authorized committee of Yum China’s board of directors adopted a stockholder rights plan (the “Rights Plan”), pursuant to which the board declared a dividend, to Yum China’s sole stock- holder of record as of October 27, 2016, of one preferred stock purchase right (a “Right”) for each of share of Yum China common stock. Before the Rights Plan expired on October 27, 2017, the Rights would trade with, and would be inseparable from, Yum China common stock. The original dividend of the Rights to the existing shareholder was recorded at fair value, which was insignificant given the contingent nature of the Rights. The embedded Rights were considered clearly and closely related to the under- lying equity host and, therefore, did not require separate accounting. Share Repurchase Program K - 0 1 m r o F The Company repurchased 6.2 million, 9.0 million and 3.4 million shares of common stock at a total cost of $261 million, $312 million and $128 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, $699 million remained avail- able for repurchase under the current authorization. Cash Dividend On October 4, 2017, the board of directors approved a regular quarterly cash dividend program, and declared an initial cash dividend of $0.10 per share on Yum China’s common stock. Total cash dividends of $38 million were paid to shareholders in December 2017. The Company paid a cash dividend of $0.10 per share for each of the first three quarters of 2018 and $0.12 per share for the fourth quarter of 2018 and each quarter of 2019. Total cash divi- dends of $181 million and $161 million were paid to shareholders in 2019 and 2018, respectively. 120 YUM CHINA – 2019 Form 10-K Accumulated (“AOCI”) Other Comprehensive Income The Company’s other comprehensive income (loss) for the years ended December 31, 2019, 2018, and 2017 and AOCI balances as of December 31, 2019 and 2018 were comprised solely of foreign currency translation adjust- ments. Other comprehensive loss was $32 million and $160 million for the years ended December 31, 2019 and 2018, respectively, and other comprehensive gain was $142 million for the year ended December 31, 2017. The accumulated balances reported in AOCI in the Consoli- dated Balance Sheets for currency translation adjustments were net loss of $49 million and $17 million as of December 31, 2019 and 2018, respectively. There was no tax effect related to the components of other comprehen- sive income for all years presented. Restricted net assets The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory laws and regulations permit payments of dividends by the Company’s PRC subsidiaries only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of oper- ations reflected in the Consolidated Financial Statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s subsidiaries. In accordance with the PRC Regulations on Enterprises with Foreign Investment and the articles of association of the Company’s PRC subsidiaries, a foreign-invested enterprise established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A foreign- invested enterprise is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its respective registered capi- tal based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors for all foreign-invested enterprises. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. As a result of these PRC laws and regulations subject to the limit discussed above that require annual appropria- tions of 10% of after-tax income to be set aside, prior to payment of dividends as general reserve fund, the Com- pany’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company in the form of dividend payments, loans or advances. The restricted net assets of the PRC subsidiaries is approxi- mately $625 million as of December 31, 2019. Furthermore, 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 suffi- cient foreign currency to pay dividends or other payments to the Company, or otherwise satisfy their foreign currency-denominated obligations. Note 16—Income Taxes 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 busi- ness deductions, and the imposition of tax on deemed repatriation of accumulated undistributed foreign earn- ings. The Tax Act has impacted Yum China in two mate- rial aspects: (1) in general, all of the foreign-source dividends received by Yum China from its foreign sub- sidiaries will be exempted from taxation starting from its 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. Based on the information available, we made a reasonable estimate of the effects and recorded the provisional amount of $164 million as an additional income tax expense in the fourth quarter of 2017. This amount included an estimated one-time transition tax of $130 million on the deemed repatriation of accumulated undistributed foreign earnings, $4 million primarily related to the re-measurement of certain deferred tax assets based on the rates at which they are expected to reverse in the future, and the valuation allowance of $30 million for certain deferred tax assets. After utilizing existing qualified foreign tax credits, the total payable of the estimated one-time transition tax was $83 million as of December 31, 2017 of which $7 million was included in Income taxes payable and $76 million was included in Other liabilities. We completed our analysis of the Tax Act in the fourth quarter of 2018 according to guidance released by the U.S. Treasury Department and the IRS as of December 2018 and made a reversal to provisional amount in the amount of $36 million for the transition tax recorded in 2017 accordingly. 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 an additional income tax expense of $8 million for the transition tax accordingly. The Tax Act requires a U.S. shareholder to be subject to tax on Global Intangible Low Taxed Income (“GILTI”) earned by certain foreign subsidiaries. We have elected the option to account for current year GILTI tax as a period cost as incurred. F o r m 1 0 - K YUM CHINA – 2019 Form 10-K 121 PART II U.S. and foreign income (loss) before taxes are set forth below: U.S. Mainland China Other Foreign The details of our income tax provision (benefit) are set forth below: Current: Deferred: Federal Foreign Federal Foreign 2019 2018 2017 (7) $ 941 69 1,003 $ (3) $ 979 (26) 950 $ 2019 2018 2017 16 $ 228 244 $ (1) $ 17 16 $ 260 $ (33) $ 214 181 $ — $ 33 33 $ 214 $ (13) 806 10 803 85 232 317 77 (15) 62 379 $ $ $ $ $ $ $ $ The reconciliation of income taxes calculated at the U.S. federal statutory rate to our effective tax rate is set forth below: U.S. federal statutory rate Impact from the Tax Act Statutory rate differential attributable to foreign operations Change in valuation allowances Impact from investment (gain) loss Others, net Effective income tax rate 2019 2018 2017 $ $ 211 8 53 2 (10) (4) 260 21.0% $ 0.8 5.3 0.2 (1.0) (0.4) 25.9% $ 199 (36) 56 (4) 4 (5) 214 21.0% $ (3.8) 5.8 (0.4) 0.5 (0.5) 22.6% $ 281 164 (60) 2 — (8) 379 35.0% 20.4 (7.5) 0.2 — (0.9) 47.2% K - 0 1 m r o F Statutory rate differential attributable to foreign operations. This item includes local taxes, withholding taxes, and shareholder-level taxes, net of foreign tax cred- its. A majority of our income is earned in China, which is generally subject to a 25% tax rate. The favorable impact in 2017 is primarily attributable to the statutory income tax rate of 25% in China, which is lower than the historical U.S. federal statutory rate of 35%. The negative impact in 2019 and 2018 is primarily due to the decrease of the U.S. federal statutory rate to 21%, which is lower than China’s statutory income tax rate. Change in valuation allowances. This item relates to changes for deferred tax assets generated or utilized dur- ing the current year and changes in our judgment regard- ing the likelihood of using deferred tax assets that existed at the beginning of the year. The change in valuation allowance as a result of the Tax Act in the amount of $29.6 million was included in ‘Impact from the Tax Act’. The impact of certain changes may offset items reflected in ‘Statutory rate differential attributable to foreign operations’. Impact from investment (gain) loss. This item relates to the unrealized gain or loss on investment in equity securi- ties of Meituan, which is non-taxable. Others. This item primarily includes the impact of perma- nent differences related to current year earnings, adjust- ments to reserves and prior years as well as U.S. tax credits and deductions. 122 YUM CHINA – 2019 Form 10-K The details of 2019 and 2018 deferred tax assets (liabilities) are set forth below: Operating losses and tax credit carryforwards Tax benefit from Little Sheep restructuring Employee benefits Share-based compensation Leases Other liabilities Deferred income and other Gross deferred tax assets Deferred tax asset valuation allowances Net deferred tax assets Intangible assets Property, plant and equipment Gain from re-measurement of equity interest upon acquisition Others Gross deferred tax liabilities Net deferred tax assets Reported in Consolidated Balance Sheets as: Deferred income taxes Other liabilities 2019 2018 $ $ $ $ $ 25 $ 18 4 5 61 13 58 184 (47) 137 $ (23) (59) (22) (5) (109) $ 28 $ 95 (67) 28 $ 28 18 6 5 41 12 50 160 (50) 110 (28) (31) (23) (4) (86) 24 89 (65) 24 We have investments in our foreign subsidiaries where the carrying values for financial reporting exceed the tax basis. We have not provided deferred tax on the portion of the excess that we believe is indefinitely reinvested, as we have the ability and intent to indefinitely postpone the basis differences from reversing with a tax consequence. The Company’s separation from YUM was intended to qualify as a tax-free reorganization for U.S. income tax purposes resulting in the excess of financial reporting basis over tax basis in our investment in the China busi- ness continuing to be indefinitely reinvested. The excess tax basis as of of December 31, 2017 was subject to the one-time transition tax under the Tax Act as a deemed repatriation of accu- mulated undistributed earnings from the foreign subsidi- aries. However, we continue to believe that the portion of the excess of financial reporting basis over tax basis (including earnings and profits subject to the one-time transition tax) is indefinitely reinvested in our foreign subsidiaries for foreign withholding tax purposes. We estimate that our total temporary difference for which we have not provided foreign withholding taxes is approxi- reporting basis over financial mately $2 billion at December 31, 2019. The foreign withholding tax rate on this amount is 5% or 10% depending on the manner of repatriation and the applica- ble tax treaties or tax arrangements. At December 31, 2019, the Company had operating loss carryforwards of $94 million, primarily related to our Lit- tle Sheep and Daojia business, most of which will expire by 2024. These losses are being carried forward in juris- dictions where we are permitted to use tax losses from prior periods to reduce future taxable income. Cash payments for tax liabilities on income tax returns filed were $255 million, $208 million and $232 million in 2019, 2018 and 2017, respectively. F o r m 1 0 - K We recognize the benefit of positions taken or expected to be taken in tax returns in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. A recognized tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. YUM CHINA – 2019 Form 10-K 123 PART II A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Beginning of Year Additions on tax positions Reductions due to statute expiration End of Year 2019 2018 $ $ 22 $ 4 (7) 19 $ 28 3 (9) 22 In 2019 and 2018, our unrecognized tax benefits were increased by $4 million and $3 million, respectively. The unrec- ognized tax benefits balance of $19 million as of December 31, 2019 related to the uncertainty with regard to the deduct- ibility of certain business expenses incurred, all of which, if recognized upon audit settlement or statute expiration, would affect the effective tax rate. The Company believes it is reasonably possible its unrecognized tax benefits of $19 million as of December 31, 2019, which is included in Other liabilities on the Consolidated Balance Sheet, may decrease by approximately $6 million in the next 12 months, which if recognized, would affect the 2020 effective tax rate. The accrued interest and penalties related to income taxes at December 31, 2019 and 2018 are set forth below: Accrued interest and penalties During 2019, 2018 and 2017, a net benefit of $1 million and $1 million and a net expense of $2 million, respec- tively, for interest and penalties was recognized in our Consolidated Statements of Income as components of our income tax provision. The Company’s results are subject to examination in the U.S. federal jurisdiction as well as various U.S. state jurisdictions as part of YUM’s and our own income tax filings, and separately in foreign jurisdictions. Any liabil- ity arising from these examinations related to periods prior to the separation is expected to be settled among the Company, YCCL and YUM in accordance with the tax matters agreement we entered into in connection with the separation. We are subject to reviews, examinations and audits by Chinese tax authorities, the IRS and other taxing author- ities with respect to income and non-income based taxes. Note 17—Segment Reporting K - 0 1 m r o F 2019 2018 $ 5 $ 6 Since 2016, we have been under a national audit on trans- fer pricing by the STA in China regarding our related party transactions for the period from 2006 to 2015. The information currently exchanged with tax authorities focuses on our franchise arrangement with YUM. We have submitted information to the extent it is available to the Company. It is reasonably possible that there could be significant developments, including expert review and assessment by the STA, within the next 12 months. The ultimate assessment will depend upon further review of the information provided and ongoing technical and other discussions with the STA and in-charge local tax author- ities, and therefore it is not possible to reasonably estimate the potential impact. We will continue to defend our transfer pricing position. However, if the STA prevails in the assessment of additional tax due based on its ruling, the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations and cash flows. The Company has two reportable segments: KFC and Pizza Hut. Starting from the first quarter of 2019, our newly developed COFFii & JOY concept and e-commerce business became operating segments, as their financial results started being regularly reviewed by the Company’s chief operating decision maker. Accordingly, our six non-reportable operating segments, Little Sheep, COFFii & JOY, East Dawning, Taco Bell, Daojia and our e-commerce business, are combined and referred to as All Other Segments, as these operating segments are insignificant both individually and in the aggregate. Segment financial information for prior years has been recast due to alignment with this change in seg- ment reporting. There was no impact on the Consolidated Financial Statements of the Company as a result of this change. See Note 1. 124 YUM CHINA – 2019 Form 10-K KFC Pizza Hut All Other Segments 2019 Corporate and Unallocated(a) Combined Elimination Consolidated 6,039 $ 1 6,040 $ 2,054 $ — 2,054 $ 121 $ 37 158 $ 562 $ — 562 $ 8,776 $ 38 8,814 $ — $ (38) (38) $ 8,776 — 8,776 KFC Pizza Hut All Other Segments 2018 Corporate and Unallocated(a) Combined Elimination Consolidated 5,688 $ — 5,688 $ 2,111 $ — 2,111 $ 99 $ 16 115 $ 517 $ — 517 $ 8,415 $ 16 8,431 $ — $ (16) (16) $ 8,415 — 8,415 KFC Pizza Hut All Other Segments 2017 Corporate and Unallocated(a) Combined Elimination Consolidated 5,066 $ — 5,066 $ 2,093 $ — 2,093 $ 106 $ — 106 $ 504 $ — 504 $ 7,769 $ — 7,769 $ — $ — — $ 7,769 — 7,769 Revenues Revenue from external customers Inter-segment revenue Total Revenues Revenue from external customers Inter-segment revenue Total Revenues Revenue from external customers Inter-segment revenue Total Operating Profit $ $ $ $ $ $ KFC(b) Pizza Hut All Other Segments Unallocated revenues from transactions with franchisees and unconsolidated affiliates(c) Unallocated Other revenues Unallocated expenses for transactions with franchisees and unconsolidated affiliates(c) Unallocated Other operating costs and expenses Unallocated and corporate G&A expenses Unallocated Closures and impairment expense(d) Unallocated Other income(e) Operating Profit Interest income, net(a) Investment gain (loss)(a) Income Before Income Taxes KFC Pizza Hut All Other Segments Corporate and Unallocated $ $ $ $ 2019 2018 2017 $ 949 114 (14) 558 4 (554) (4) (145) (11) 4 901 39 63 1,003 $ 895 97 (12) 514 3 (512) (2) (128) (12) 98 941 36 (27) 950 $ $ F o r m 1 0 - K 802 157 (9) 504 — (500) — (185) — 9 778 25 — 803 Depreciation and Amortization 2019 2018 2017 290 120 5 13 428 $ $ 296 129 8 12 445 $ $ 265 126 4 14 409 YUM CHINA – 2019 Form 10-K 125 PART II KFC(f) Pizza Hut(f) All Other Segments(f) Corporate and Unallocated(d) KFC Pizza Hut All Other Segments Corporate and Unallocated KFC(g) Pizza Hut All Other Segments Corporate and Unallocated(h) $ $ $ $ Impairment Charges 2019 2018 2017 16 20 2 11 49 $ $ 14 26 — 12 52 Capital Spending 2019 2018 $ $ $ $ 27 31 — — 58 2017 227 93 2 93 415 292 77 6 95 470 Total Assets 2019 2018 $ 3,160 950 166 2,674 6,950 $ 1,745 558 132 2,175 4,610 264 71 10 90 435 $ $ $ $ (a) Amounts have not been allocated to any segment for performance reporting purposes. K - 0 1 m r o F (b) (c) (d) (e) (f) Includes equity income from investments in unconsolidated affiliates of $69 million, $65 million and $65 million in 2019, 2018 and 2017, respectively. Primarily includes revenues and associated expenses of transactions with franchisee and unconsolidated affiliates derived from the Company’s central procurement model whereby the Company centrally purchases all food and paper products from suppliers then sells and delivers to all restaurants, including franchisees and unconsolidated affiliates. Amounts have not been allocated to any segment for purposes of making operating decisions or assess- ing financial performance as the transactions are deemed corporate revenues and expenses in nature. Includes impairment charges on intangible assets and goodwill attributable to the Daojia business in 2019 and 2018, respectively. See Note 5. In 2018, the unallocated other income primarily includes gain from re-measurement of previously held equity interest in connection with the acquisition of Wuxi KFC. See Note 5. Primarily includes store closure impairment charges, restaurant-level impairment charges resulting from our semi-annual impairment evaluation, and incremental restaurant-level impairment charges as a result of adopting ASC 842. (See Note 12). (g) Includes investments in unconsolidated affiliates. (h) Primarily includes cash and cash equivalents, short-term investments, inventories and investment in equity secu- rities that are centrally managed. 126 YUM CHINA – 2019 Form 10-K As substantially all of the Company’s revenue is derived from the PRC and substantially all of the Company’s long-lived assets are located in the PRC, no geographical information is presented. In addition, revenue derived from and long-lived assets located in the U.S., the Company’s country of domicile, are immaterial. Note 18—Contingencies Indemnification of China Tax on Indirect Transfers of Assets In February 2015, the STA issued Bulletin 7 on Income arising from Indirect Transfers of Assets by Non-Resident Enterprises. Pursuant to Bulletin 7, an “indirect transfer” of Chinese taxable assets, including equity interests in a Chinese resident enterprise (“Chinese interests”), by a non-resident enterprise, may be recharacterized and treated as a direct transfer of Chinese taxable assets, if such arrangement does not have reasonable commercial purpose and the transferor has avoided payment of Chinese enterprise income tax. As a result, gains derived from such an indirect transfer may be subject to Chinese enterprise income tax at a rate of 10%. YUM concluded and we concurred that it is more likely than not that YUM will not be subject to this tax with respect to the distribution. However, given how recently Bulletin 7 was promulgated, there are significant uncer- tainties regarding what constitutes a reasonable commer- cial purpose, how the safe harbor provisions for group restructurings are to be interpreted and how the taxing authorities will ultimately view the distribution. As a result, YUM’s position could be challenged by Chinese tax authorities resulting in a 10% tax assessed on the dif- ference between the fair market value and the tax basis of the separated China business. As YUM’s tax basis in the China business is minimal, the amount of such a tax could be significant. Any tax liability arising from the application of Bulletin 7 to the distribution is expected to be settled in accordance with the tax matters agreement between the Company and YUM. Pursuant to the tax matters agreement, to the extent any Chinese indirect transfer tax pursuant to Bulletin 7 is imposed, such tax and related losses will be allocated between YUM and the Company in proportion to their respective share of the combined market capitalization of YUM and the Company during the 30 trading days after the separation. Such a settlement could be significant and have a material adverse effect on our results of operations and our financial condition. At the inception of the tax indemnity being provided to YUM, the fair value of the non-contingent obligation to stand ready to perform was insignificant and the liability for the contingent obligation to make payment was not probable or estimable. Guarantees Affiliates for Franchisees and Unconsolidated From time to time we have guaranteed certain lines of credit and loans of franchisees and unconsolidated affili- ates. As of December 31, 2019, guarantees on behalf of franchisees were immaterial and no guarantees were out- standing for unconsolidated affiliates. Indemnification of Officers and Directors The Company’s amended and restated certificate of incorporation and amended and restated bylaws include provisions that require the Company to indemnify direc- tors or officers for monetary damages for actions taken as a director or officer of the Company or while serving at the Company’s request as a director or officer or another position at another corporation or enterprise, as the case may be. The Company purchases standard directors and officers insurance to cover claims or a portion of the claims made against its directors and officers. Since a maximum obligation is not explicitly stated in the Com- pany’s bylaws or in the indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated. The Com- pany has not been required to make payments related to these obligations, and the fair value for these obligations is zero as of December 31, 2019. Legal Proceedings The Company is subject to various lawsuits covering a variety of allegations from time to time. The Company YUM CHINA – 2019 Form 10-K 127 F o r m 1 0 - K PART II believes that the ultimate liability, if any, in excess of amounts already provided for these matters in the Con- solidated Financial Statements, is not likely to have a material adverse effect on the Company’s annual results of operations, financial condition or cash flows. Matters faced by the Company from time to time include, but are not limited to, claims from landlords, employees, cus- tomers and others related to operational, contractual or employment issues. Note 19—Selected Quarterly Financial Data (unaudited; in millions, except per share amounts) Revenues: Company sales Franchise fees and income Revenues from transactions with franchisees and $ unconsolidated affiliates Other revenues Total revenues Restaurant profit Operating Profit Net Income—Yum China Holdings, Inc. Basic earnings per common share Diluted earnings per common share K - 0 1 m r o F Revenues: Company sales Franchise fees and income Revenues from transactions with franchisees and unconsolidated affiliates Other revenues Total revenues Restaurant profit Operating Profit Net Income (Loss)—Yum China Holdings, Inc. Basic earnings (loss) per common share Diluted earnings (loss) per common share $ $ $ $ $ First Quarter Second Quarter 2019 Third Quarter Fourth Quarter Total 2,089 39 170 6 2,304 386 303 222 0.59 0.57 First Quarter 2,016 40 161 4 2,221 361 395 288 0.75 0.72 $ $ $ $ $ $ 1,926 36 154 8 2,124 283 204 178 0.47 0.46 Second Quarter 1,888 34 141 5 2,068 286 193 143 0.37 0.36 $ $ $ $ $ $ 2,097 38 172 12 2,319 372 300 223 0.59 0.58 2018 Third Quarter 2,008 36 159 9 2,212 353 269 203 0.53 0.51 $ $ $ $ $ $ 1,813 35 158 23 2,029 225 94 90 0.24 0.23 Fourth Quarter 1,721 31 142 20 1,914 199 84 74 0.19 0.19 $ $ $ $ $ $ 7,925 148 654 49 8,776 1,266 901 713 1.89 1.84 Total 7,633 141 603 38 8,415 1,199 941 708 1.84 1.79 Note 20—Subsequent Events Novel Coronavirus Outbreak Starting January 2020, the novel coronavirus outbreak originating in Wuhan, China has significantly impacted the Company’s operations, including the temporary clo- sure of more than 30% of its restaurants in China during the Chinese New Year holiday, and a significant decline in sales for restaurants that remained open. Given the uncertainty of the situation, the duration of the business disruption, resulting reduced customer traffic and related financial impact cannot be reasonably estimated at this time but are expected to have a material adverse impact on the Company’s results of operations, cash flows and financial position for 2020. 128 YUM CHINA – 2019 Form 10-K Cash Dividend On February 5, 2020, the Company announced that the board of directors declared a cash dividend of $0.12 per share on Yum China’s common stock, payable as of the close of business on March 25, 2020, to stockholders of record as of the close of business on March 4, 2020. Total estimated cash dividend payable is approximately $45 million. Share-Based Compensation In February 2020, the Company’s board of directors approved new grants of SARs, RSUs and PSUs to employees under the 2016 Plan with the estimated total grant-date fair value of $60 million. The awards will be earned based on their respective vesting terms, with PSUs also subject to market conditions or performance condi- tions. Certain PSU awards were granted to select employ- ees who were deemed critical to the Company’s execution of its strategic operating plan. These PSU awards will only vest if threshold performance goals are achieved over a four-year performance period, with the payout ranging from 0% to 200% of the target number of shares subject to the PSU awards. The estimated grant-date fair value of these award based on target performance is $35 million. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. ITEM 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures The Company has evaluated the effectiveness of the design and operation of its disclosure controls and proce- dures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on the evaluation, performed under the supervision and with the participa- tion of the Company’s management, including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer the Company’s management, including the CEO and CFO, concluded that the Compa- ny’s disclosure controls and procedures were effective as of the end of the period covered by this report. (the “CFO”), Management’s Report on Internal Controls Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial F o r m 1 0 - K reporting, as such term is defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Under the supervi- sion and with the participation of our management, including the CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework (2013), our manage- ment concluded that our internal control over financial reporting was effective as of December 31, 2019. KPMG Huazhen LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statements included in this Annual Report on Form 10-K and the effectiveness of our internal control over financial reporting as of December 31, 2019 and has issued their report, included herein. YUM CHINA – 2019 Form 10-K 129 PART II Changes in Internal Control There were no changes with respect to the Company’s internal control over financial reporting or in other factors that materially affected, or are reasonably likely to mate- rially affect, internal control over financial reporting dur- ing the quarter ended December 31, 2019. ITEM 9B. Other Information. On February 26, 2020, the Compensation Committee of the Board of Directors of the Company authorized the entry into Restrictive Covenant Letter Agreements with select employees of the Company, including the Compa- ny’s executive officers. The Restrictive Covenant Letter Agreements include restrictive covenants relating to non-disclosure, non-competition, non-solicitation and non-disparagement, as well as cooperation in investiga- tions and litigation clauses. As consideration for the restrictive covenants, the Company is obligated to pay an amount equivalent to five times the employee’s average monthly salary upon a termination of employment, other than in the case of a change in control related termination or the executive officer’s death. K - 0 1 m r o F 130 YUM CHINA – 2019 Form 10-K PART III ITEM 10. Directors, Executive Officers and Corporate Governance. Information regarding the Company’s Audit Committee and the Audit Committee financial expert, the Company’s code of conduct and background of the directors appearing under the captions “Governance of the Company” and “Election of Directors” is incorporated herein by reference to the 2020 Proxy Statement. Information regarding executive officers of the Company is incorporated by reference from Part I of this Form 10-K. ITEM 11. Executive Compensation. Information regarding executive and director compensation and the Company’s Compensation Committee appearing under the captions “Executive Compensation,” “2019 Director Compensation” and “Governance of the Company” is incorporated herein by reference to the 2020 Proxy Statement. ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Information regarding equity compensation plans and security ownership of certain beneficial owners and management appearing under the captions “Executive Compensation” and “Stock Ownership Information” is incorporated herein by reference to the 2020 Proxy Statement. ITEM 13. Certain Relationships and Related Transactions, and Director Independence. Information regarding certain relationships and related transactions and information regarding director independence appearing under the caption “Governance of the Company” is incorporated herein by reference to the 2020 Proxy State- ment. F o r m 1 0 - K ITEM 14. Principal Accountant Fees and Services. Information regarding principal accountant fees and services and audit committee pre-approval policies and procedures appearing under the caption “Ratification of Independent Auditor” is incorporated herein by reference to the 2020 Proxy Statement. YUM CHINA – 2019 Form 10-K 131 PART IV ITEM 15. Exhibits and Financial Statement Schedules. (a) (1) Financial Statements: Consolidated Financial Statements filed as part of this report are listed under Part II, Item 8 of this Form 10-K. (2) (3) Financial Statement Schedules: No schedules are required because either the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the informa- tion required is included in the Consolidated Financial Statements thereto filed as a part of this Form 10-K. Exhibits: The exhibits listed in the accompanying Exhibit Index are filed as part of this Form 10-K. The Index to Exhibits specifically identifies each management contract or compensatory plan required to be filed as an exhibit to this Form 10-K. K - 0 1 m r o F 132 YUM CHINA – 2019 Form 10-K Exhibit Number 2.1** 3.1 3.2 4.1 4.2 4.3 4.4 4.5 10.1 10.2 10.3 10.4 10.5 10.6 Yum China Holdings, Inc. Exhibit Index (Item 15) Description of Exhibits Separation and Distribution Agreement, dated as of October 31, 2016, by and among Yum! Brands, Inc., Yum Restaurants Consulting (Shanghai) Company Limited and Yum China Holdings, Inc. (incorporated by reference to Exhibit 2.1 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on November 1, 2016). Amended and Restated Certificate of Incorporation of Yum China Holdings, Inc. (incorporated by reference to Exhibit 3.1 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on November 1, 2016). Amended and Restated Bylaws of Yum China Holdings, Inc. (incorporated by reference to Exhibit 3.2 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on November 1, 2016). Warrant No. 1 issued to Pollos Investment L.P. on January 9, 2017 (incorporated by reference to Exhibit 10.3 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on January 9, 2017). Warrant No. 1 issued to API (Hong Kong) Investment Limited on January 9, 2017 (incorporated by reference to Exhibit 10.5 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on January 9, 2017). Warrant No. 2 issued to API (Hong Kong) Investment Limited on January 9, 2017 (incorporated by reference to Exhibit 10.6 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on January 9, 2017). Form of Replacement Warrant issued to Pollos Upside L.P. (as transferee of Warrant No. 2 issued to Pollos Investment L.P. on January 9, 2017) * Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. * Master License Agreement, dated as of October 31, 2016, by and between Yum! Restaurants Asia Pte. Ltd. and Yum Restaurants Consulting (Shanghai) Company Limited (incorporated by reference to Exhibit 10.1 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on November 1, 2016). Tax Matters Agreement, dated as of October 31, 2016, by and among Yum! Brands, Inc., Yum China Holdings, Inc. and Yum Restaurants Consulting (Shanghai) Company Limited (incorporated by reference to Exhibit 10.2 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on November 1, 2016). F o r m 1 0 - K Employee Matters Agreement, dated as of October 31, 2016, by and between Yum! Brands, Inc. and Yum China Holdings, Inc. (incorporated by reference to Exhibit 10.3 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on November 1, 2016). Name License Agreement, dated as of October 31, 2016, by and between Yum! Brands, Inc. and Yum China Holdings, Inc. (incorporated by reference to Exhibit 10.5 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on November 1, 2016). Guaranty of Master License Agreement, dated as of October 31, 2016, by Yum China Holdings, Inc. (incorporated by reference to Exhibit 10.6 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on November 1, 2016). Investment Agreement, dated as of September 1, 2016, by and among Yum! Brands, Inc., Yum China Holdings, Inc. and Pollos Investment L.P. (incorporated by reference to Exhibit 10.11 to Amendment No. 5 to Yum China Holdings, Inc.’s Registration Statement on Form 10, filed on September 16, 2016). YUM CHINA – 2019 Form 10-K 133 PART IV Exhibit Number 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 K - 0 1 m r o F Description of Exhibits Investment Agreement, dated as of September 1, 2016, by and among Yum! Brands, Inc., Yum China Holdings, Inc. and API (Hong Kong) Investment Limited (incorporated by reference to Exhibit 10.12 to Amendment No. 5 to Yum China Holdings, Inc.’s Registration Statement on Form 10, filed on September 16, 2016). Letter Agreement, dated as of October 7, 2016, by and among Yum! Brands, Inc., Yum China Holdings, Inc., API (Hong Kong) Investment Limited and Pollos Investment L.P. (incorporated by reference to Exhibit 10.9 to Yum China Holdings, Inc.’s Annual Report on Form 10-K filed on March 8, 2017). Shareholders Agreement, dated as of November 1, 2016, by and among Yum China Holdings, Inc., Pollos Investment L.P. and API (Hong Kong) Investment Limited (incorporated by reference to Exhibit 10.7 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on November 1, 2016). Form of Yum China Holdings, Inc. Indemnification Agreement (incorporated by reference to Exhibit 10.10 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on November 1, 2016). Yum China Holdings, Inc. Long Term Incentive Plan (incorporated by reference to Exhibit 10.7 to Amendment No. 5 to Yum China Holdings, Inc.’s Registration Statement on Form 10, filed on September 16, 2016). † Yum China Holdings, Inc. Leadership Retirement Plan (incorporated by reference to Exhibit 10.8 to Amendment No. 5 to Yum China Holdings, Inc.’s Registration Statement on Form 10, filed on September 16, 2016). † Form of Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.10 to Amendment No. 5 to Yum China Holdings, Inc.’s Registration Statement on Form 10, filed on September 16, 2016). † Form of Stock Appreciation Right Agreement (incorporated by reference to Exhibit 10.9 to Amendment No. 5 to Yum China Holdings, Inc.’s Registration Statement on Form 10, filed on September 16, 2016). † Letter of Understanding issued by Yum China Holdings, Inc. to Johnson Huang, dated as of February 6, 2017 (incorporated by reference to Exhibit 10.21 to Yum China Holdings, Inc.’s Annual Report on Form 10-K filed on March 8, 2017). † Transition Agreement, dated as of September 29, 2017, by and between Yum China Holdings, Inc. and Micky Pant (incorporated by reference to Exhibit 10.1 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on October 5, 2017). † Letter of Understanding, dated as of September 29, 2017, by and between Yum China Holdings, Inc. and Joey Wat (incorporated by reference to Exhibit 10.2 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on October 5, 2017). † Yum China Holdings, Inc. Performance Share Unit Plan (incorporated by reference to Exhibit 10.1 to Yum China Holdings, Inc.’s Quarterly Report on Form 10-Q filed on May 4, 2018). † Performance Share Unit Award Notice issued by Yum China Holdings, Inc. to Joey Wat, dated as of March 2, 2018 (incorporated by reference to Exhibit 10.2 to Yum China Holdings, Inc.’s Quarterly Report on Form 10-Q filed on May 4, 2018). † Term Employment Agreement, dated as of March 22, 2019, by and between Yum China Holdings, Inc. and Shella Ng (incorporated by reference to Exhibit 10.1 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on March 22, 2019). † 134 YUM CHINA – 2019 Form 10-K Exhibit Number 10.21 10.22 10.23 21.1 23.1 31.1 31.2 32.1 32.2 Description of Exhibits Post-Termination Agreement, effective October 16, 2019, by and between Yum China Holdings, Inc. and Jacky Lo (incorporated by reference to Exhibit 10.1 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on September 6, 2019). † Employment Letter, effective September 16, 2019, by and between Yum China Holdings, Inc. and Andy Yeung (incorporated by reference to Exhibit 10.2 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on September 6, 2019). † Yum China Holdings, Inc. Change in Control Severance Plan (incorporated by reference to Exhibit 10.1 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on October 2, 2019). † Subsidiaries of Yum China Holdings, Inc. * Consent of Independent Registered Public Accounting Firm. * Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document * 101.SCH Inline XBRL Taxonomy Extension Schema Document * 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document * 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document * 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document * 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document * F o r m 1 0 - K 104 * ** Cover Page Interactive Data File—the cover page XBRL tags are embedded within the Inline XBRL document * Filed or furnished herewith. Certain schedules and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedules and/or exhibits will be furnished to the Securities and Exchange Commission upon request. † Indicates a management contract or compensatory plan. ITEM 16. Form 10-K Summary. Not applicable. YUM CHINA – 2019 Form 10-K 135 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. YUM CHINA HOLDINGS, INC. By: /s/ Joey Wat Joey Wat Chief Executive Officer Date: February 27, 2020 K - 0 1 m r o F 136 YUM CHINA – 2019 Form 10-K Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature /s/ Joey Wat Joey Wat /s/ Andy Yeung Andy Yeung /s/ Xueling Lu Xueling Lu /s/ Peter A. Bassi Peter A. Bassi /s/ Christian L. Campbell Christian L. Campbell /s/ Ed Yiu-Cheong Chan Ed Yiu-Cheong Chan /s/ Edouard Ettedgui Edouard Ettedgui /s/ Cyril Han Cyril Han /s/ Louis T. Hsieh Louis T. Hsieh /s/ Fred Hu Fred Hu /s/ Ruby Lu Ruby Lu /s/ Micky Pant Micky Pant /s/ Zili Shao Zili Shao /s/ William Wang William Wang Title Chief Executive Officer and Director (principal executive officer) Chief Financial Officer (principal financial officer) Controller (controller and principal accounting officer) Director Director Director Director Director Director Director Director Director Director Director Date February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 F o r m 1 0 - K February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 YUM CHINA – 2019 Form 10-K 137