Correspondence 0000950170-23-000009 from Yum China Holdings, Inc. (YUMC)
Yum China Holdings, Inc.
Date: Jan. 3, 2023 · CIK: 0001673358 · Accession: 0000950170-23-000009
AI Filing Summary & Sentiment
Referenced dates: December 16, 2022, September 21, 2022
Letter
January 3, 2023
VIA EDGAR & E-MAIL
Securities and Exchange Commission
Division of Corporation Finance
Office of Trade & Services
100 F Street, N.E.
Washington, D.C. 20549
Attn: Taylor Beech
Mara Ransom
Re: Yum China Holdings, Inc.
Form 10-K for the Year Ended December 31, 2021
Filed February 28, 2022
Correspondence Filed October 31, 2022
File No. 1-37762
Ladies and Gentlemen:
Yum China Holdings, Inc. (the “Company”) is pleased to respond to the letter dated December 16, 2022 (the “Comment Letter”) from the staff (the “Staff”) of the Securities and Exchange Commission with respect to the Company’s annual report on Form 10-K for the year ended December 31, 2021. For the convenience of the Staff’s review, we have set forth below the comments contained in the Staff’s letter in italics followed by the Company’s response.
Correspondence Filed October 31, 2022
Item 1. Business, page 3
1.We note your proposed revised disclosure in response to comment 1 and reissue our comment in part. Provide prominent disclosure in this section about the legal and operational risks associated with having the majority of the company’s operations in China. Your disclosure should also make clear whether these risks could significantly limit or completely hinder your ability to offer securities to investors. Your disclosure should address how recent statements and regulatory actions by China’s government, such as those related to the use of variable interest entities and data security or anti-monopoly concerns, have or may impact the company’s ability to conduct its business, accept foreign investments, or list on a U.S. or other foreign exchange. Where you
suggest revised disclosure to indicate the value of an invest in your securities could decline, please go on to state “and become worthless.” In this regard, we note you have only included a cross reference to your risk factors instead of including prominent disclosure in this section as well.
Company Response:
The Company proposes to include the following disclosure in a prominent location under the heading “Item 1. Business” of its future annual reports on Form 10-K:
Doing Business in China
Risks Related to Doing Business in China
Substantially all of our business operations are located in China. Accordingly, we face various legal and operational risks and uncertainties under the complex and evolving PRC laws and regulations, including the following:
•Changes in Chinese political policies and economic and social policies or conditions may materially and adversely affect our business, results of operations and financial condition and may result in our inability to sustain our growth and expansion strategies.
•Uncertainties with respect to the interpretation and enforcement of Chinese laws, rules and regulations could have a material adverse effect on us.
•The audit report included in this annual report on Form 10-K is prepared by auditors who previously were unable to be inspected by the Public Company Accounting Oversight Board and, as such, our stockholders have been in the past and may in the future again be deprived of the benefits of such inspection, and our common stock may be subject to delisting from the New York Stock Exchange in the future.
•Changes in political, business, economic and trade relations between the United States and China may have a material adverse impact on our business, results of operations and financial condition.
•Fluctuation in the value of RMB may result in foreign currency exchange losses.
•The increasing focus on environmental sustainability issues may create operational challenges for us, increase our costs and harm our reputation.
•Interventions in or the imposition of restrictions and limitations by the PRC government on currency conversion and payments of foreign currency and RMB out of mainland China may limit our ability to utilize our cash balances effectively, including making funds held by our China-based subsidiaries unavailable for use outside of mainland China, which could limit or eliminate our ability to pay dividends and affect the value of your investment.
•Changes in the laws and regulations of China or noncompliance with applicable laws and regulations may have a significant impact on our business, results of operations and financial condition, and may cause the value of our securities to decline.
•We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries in China to fund offshore cash requirements.
•Under the EIT Law, if we are classified as a China resident enterprise for Chinese enterprise income tax purposes, such classification would likely result in unfavorable tax consequences to us and our non-Chinese stockholders.
•We and our stockholders face uncertainty with respect to indirect transfers of equity interests in China resident enterprises through transfer of non-Chinese-holding companies. Enhanced scrutiny by the Chinese tax authorities may have a negative impact on potential acquisitions and dispositions we may pursue in the future.
•There may be difficulties in effecting service of legal process, conducting investigations, collecting evidence, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us and our management.
•The Chinese government may determine that the variable interest entity structure of Daojia does not comply with Chinese laws on foreign investment in restricted industries.
•Certain defects caused by non-registration of our lease agreements related to certain properties occupied by us in China may materially and adversely affect our ability to use such properties.
•Our restaurants are susceptible to risks in relation to unexpected land acquisitions, building closures or demolitions.
•Any failure to comply with Chinese regulations regarding our employee equity incentive plans may subject Chinese plan participants or us to fines and other legal or administrative sanctions.
•Failure to make adequate contributions to various employee benefit plans as required by Chinese regulations may subject us to penalties.
•Proceedings instituted by the SEC against certain China-based accounting firms, including our independent registered public accounting firm, could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act.
•Chinese regulation of loans to, and direct investment in, Chinese entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from making loans or additional capital contributions to our Chinese
subsidiaries, which may materially and adversely affect our liquidity and our ability to fund and expand our business.
•Regulations regarding acquisitions may impose significant regulatory approval and review requirements, which could make it more difficult for us to pursue growth through acquisitions.
•The PRC government has significant oversight and discretion to exert control over offerings of our securities conducted outside of China and foreign investment in China-based issuers, and may limit or completely hinder our ability to offer securities to investors, which may cause the value of such securities to significantly decline.
These risks could result in a material adverse change in our operations and the value of our shares, significantly limit or completely hinder our ability to offer or continue to offer securities to investors, or cause the value of such securities to significantly decline or become worthless. For a detailed description of risks related to doing business in China, refer to “Item 1A. Risk Factors—Risks Related to Doing Business in China.” For more information regarding the effect of government regulations on the Company, including PRC regulations, refer to “Item 1. Business—Government Regulation.” For more information regarding the Company’s cash flows into and out of China, refer to “Item 1. Business—Doing Business in China—Cash Flows.”
The Company respectfully notes that it has only one variable interest entity acquired as part of its acquisition of Daojia, and Daojia, which represents less than 1% of the Company’s total revenue, is immaterial to the Company as a whole. Therefore, the Company does not believe that Chinese regulations pertaining to VIEs represent a material risk to the Company, other than as currently disclosed in the Company’s risk factors on pages 23, 51 and 52 of the Company’s Form 10-K filed on February 28, 2022 (“2021 Form 10-K”), revised and supplemented as discussed in the Company’s response dated October 31, 2022 (the “Prior Response”) to the Staff’s letter dated September 21, 2022 (the “Prior Letter”). Furthermore, the Company has proposed additional disclosure in “Item 1. Business” regarding data security and anti-monopoly risks as noted in response to comment 7 below and as provided in the Prior Response. The Company also notes that the Company currently includes in its 2021 Form 10-K a risk factor relating to Chinese anti-monopoly regulations under the heading “Regulations regarding acquisitions may impose significant regulatory approval and review requirements, which could make it more difficult for us to pursue growth through acquisitions” on page 56 of the 2021 Form 10-K.
2.We note your revised disclosure in response to comment 2. Where you address the August 26, 2022 Statement of Protocol, please further revise to state that the PCAOB will be required to reassess its determinations by the end of 2022.
Company Response:
The Company acknowledges the Staff’s comment and undertakes to revise the referenced disclosure to state that the PCAOB will be required to reassess its determinations by the end of 2022.
3.We note your response to comment 3 and reissue our comment. The disclosure here should not be qualified by materiality. Provide proposed revised disclosure that includes a clear description of how cash is transferred through your organization. Quantify in that disclosure any cash flows and transfers of other assets by type that have occurred between the holding company and its subsidiaries, and direction of transfer. Quantify any dividends or distributions that a subsidiary has made to the holding company and which entity made such transfer, and their tax consequences. Similarly quantify dividends or distributions made to U.S. investors, the source, and their tax consequences. Your disclosure should make clear if no transfers, dividends, or distributions have been made to date. Provide cross-references to the consolidated financial statements.
Company Response:
The Company proposes to include the following disclosure under the heading “Item 1. Business—Doing Business in China” in future filings:
Cash Flows
Yum China is a Delaware holding company conducting substantially all of its operations in China through its China subsidiaries. Yum China derives substantially all of its revenue through its operations in China, and Yum China indirectly owns, and receives dividends from, its China subsidiaries. In addition, the Company has also generated cash from its global offering in September 2020.
For the year ended December 31, 2021, the Company’s China subsidiaries distributed approximately $411 million in dividends to the Company’s Hong Kong-incorporated holding companies. Dividends paid by China subsidiaries to their direct offshore parent company are subject to Chinese withholding income tax at the rate of 10%, but Hong Kong has a tax arrangement with mainland China that provides for a 5% withholding tax on dividends upon meeting certain conditions and requirements. Once distributed outside of mainland China, the funds are freely transferrable. For the year ended December 31, 2021, the Company’s Hong Kong subsidiaries did not distribute dividends to the Company’s Delaware holding company.
In 2021, Yum China paid cash dividends to stockholders totaling $203 million and repurchased $75 million of its common stock. The source of funds for these dividends and repurchases was cash on hand held outside of mainland China. These dividends to stockholders and repurchases generally had no tax consequence to the Company, but may be taxable (including by way of withholding) to its stockholders. In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed into law in the U.S. The IRA contains certain tax measures, including an excise tax of 1% on net share repurchases that occur after December 31, 2022. For more information on our dividends and share repurchases, see the Consolidated Statements of Cash Flows and Note 16 to the Consolidated Financial Statements in our Form 10-K for the year ended December 31, 2021.
In addition, Yum China makes investments in its China subsidiaries through capital contributions to further support their operational and growth needs. For the year ended December 31, 2021, one of Yum China’s subsidiaries, which was incorporated in Hong Kong, made capital contributions to the Company’s China subsidiaries totaling approximately $95 million. Cash may also be transferred among the Company’s China subsidiaries and their offshore holding companies by means of intercompany loans. No such intercompany loans were made in 2021.
For more information regarding the Company’s cash flows, see our Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 and the related notes to our Consolidated Financial Statements.
4.We note your response to comment 4 and reissue our comment in part. Please amend your disclosure here and in the summary risk factors and risk factors sections to state that, to the extent cash in the business is in the PRC or a PRC entity, the funds may not be available for other use outside of the PRC, including for distributing dividends to your investors, due to interventions in or the imposition of restrictions and limitations on the ability of you or your subsidiaries by the PRC government to transfer cash. Provide a cross-reference to the other discussions in this section.
Company Response:
The Company refers to the disclosure set forth in response to comment 1 to be included in “Item 1. Business” under the heading “Interventions in or the imposition of restrictions and limitations by the PRC government on currency conversion and payments of foreign currency and RMB out of mainland China may limit our ability to utilize our cash balances effectively, including making funds held by our China-based subsidiaries unavailable for use outside of mainland China, which could limit or eliminate our ability to pay dividends and affect the value of your investment.” The Company also refers to the cross references to the more detailed discussions of risk factors, government regulations and cash flows set forth in response to comment 1 above.
Additionally, the Company undertakes to include a summary of this risk factor under “Risk Factors—Summary of Risk Factors” and to replace the risk factor heading “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” with the above revised heading.
5.We note your response to comments 3 and 5 and reissue comment 5 in part. Move the disclosure under the headings Regulations Relating to Dividend Distribution and Regulations Relating to Taxation on page 18 to a more prominent place in this section. Also include disclosure addressing governmental control of currency conversion and payments of foreign currency and
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CORRESP
January 3, 2023
VIA EDGAR & E-MAIL
Securities and Exchange Commission
Division of Corporation Finance
Office of Trade & Services
100 F Street, N.E.
Washington, D.C. 20549
Attn: Taylor Beech
Mara Ransom
Re: Yum China Holdings, Inc.
Form 10-K for the Year Ended December 31, 2021
Filed February 28, 2022
Correspondence Filed October 31, 2022
File No. 1-37762
Ladies and Gentlemen:
Yum China Holdings, Inc. (the “Company”) is pleased to respond to the letter dated December 16, 2022 (the “Comment Letter”) from the staff (the “Staff”) of the Securities and Exchange Commission with respect to the Company’s annual report on Form 10-K for the year ended December 31, 2021. For the convenience of the Staff’s review, we have set forth below the comments contained in the Staff’s letter in italics followed by the Company’s response.
Correspondence Filed October 31, 2022
Item 1. Business, page 3
1.We note your proposed revised disclosure in response to comment 1 and reissue our comment in part. Provide prominent disclosure in this section about the legal and operational risks associated with having the majority of the company’s operations in China. Your disclosure should also make clear whether these risks could significantly limit or completely hinder your ability to offer securities to investors. Your disclosure should address how recent statements and regulatory actions by China’s government, such as those related to the use of variable interest entities and data security or anti-monopoly concerns, have or may impact the company’s ability to conduct its business, accept foreign investments, or list on a U.S. or other foreign exchange. Where you
1
suggest revised disclosure to indicate the value of an invest in your securities could decline, please go on to state “and become worthless.” In this regard, we note you have only included a cross reference to your risk factors instead of including prominent disclosure in this section as well.
Company Response:
The Company proposes to include the following disclosure in a prominent location under the heading “Item 1. Business” of its future annual reports on Form 10-K:
Doing Business in China
Risks Related to Doing Business in China
Substantially all of our business operations are located in China. Accordingly, we face various legal and operational risks and uncertainties under the complex and evolving PRC laws and regulations, including the following:
•Changes in Chinese political policies and economic and social policies or conditions may materially and adversely affect our business, results of operations and financial condition and may result in our inability to sustain our growth and expansion strategies.
•Uncertainties with respect to the interpretation and enforcement of Chinese laws, rules and regulations could have a material adverse effect on us.
•The audit report included in this annual report on Form 10-K is prepared by auditors who previously were unable to be inspected by the Public Company Accounting Oversight Board and, as such, our stockholders have been in the past and may in the future again be deprived of the benefits of such inspection, and our common stock may be subject to delisting from the New York Stock Exchange in the future.
•Changes in political, business, economic and trade relations between the United States and China may have a material adverse impact on our business, results of operations and financial condition.
•Fluctuation in the value of RMB may result in foreign currency exchange losses.
•The increasing focus on environmental sustainability issues may create operational challenges for us, increase our costs and harm our reputation.
•Interventions in or the imposition of restrictions and limitations by the PRC government on currency conversion and payments of foreign currency and RMB out of mainland China may limit our ability to utilize our cash balances effectively, including making funds held by our China-based subsidiaries unavailable for use outside of mainland China, which could limit or eliminate our ability to pay dividends and affect the value of your investment.
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•Changes in the laws and regulations of China or noncompliance with applicable laws and regulations may have a significant impact on our business, results of operations and financial condition, and may cause the value of our securities to decline.
•We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries in China to fund offshore cash requirements.
•Under the EIT Law, if we are classified as a China resident enterprise for Chinese enterprise income tax purposes, such classification would likely result in unfavorable tax consequences to us and our non-Chinese stockholders.
•We and our stockholders face uncertainty with respect to indirect transfers of equity interests in China resident enterprises through transfer of non-Chinese-holding companies. Enhanced scrutiny by the Chinese tax authorities may have a negative impact on potential acquisitions and dispositions we may pursue in the future.
•There may be difficulties in effecting service of legal process, conducting investigations, collecting evidence, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us and our management.
•The Chinese government may determine that the variable interest entity structure of Daojia does not comply with Chinese laws on foreign investment in restricted industries.
•Certain defects caused by non-registration of our lease agreements related to certain properties occupied by us in China may materially and adversely affect our ability to use such properties.
•Our restaurants are susceptible to risks in relation to unexpected land acquisitions, building closures or demolitions.
•Any failure to comply with Chinese regulations regarding our employee equity incentive plans may subject Chinese plan participants or us to fines and other legal or administrative sanctions.
•Failure to make adequate contributions to various employee benefit plans as required by Chinese regulations may subject us to penalties.
•Proceedings instituted by the SEC against certain China-based accounting firms, including our independent registered public accounting firm, could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act.
•Chinese regulation of loans to, and direct investment in, Chinese entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from making loans or additional capital contributions to our Chinese
3
subsidiaries, which may materially and adversely affect our liquidity and our ability to fund and expand our business.
•Regulations regarding acquisitions may impose significant regulatory approval and review requirements, which could make it more difficult for us to pursue growth through acquisitions.
•The PRC government has significant oversight and discretion to exert control over offerings of our securities conducted outside of China and foreign investment in China-based issuers, and may limit or completely hinder our ability to offer securities to investors, which may cause the value of such securities to significantly decline.
These risks could result in a material adverse change in our operations and the value of our shares, significantly limit or completely hinder our ability to offer or continue to offer securities to investors, or cause the value of such securities to significantly decline or become worthless. For a detailed description of risks related to doing business in China, refer to “Item 1A. Risk Factors—Risks Related to Doing Business in China.” For more information regarding the effect of government regulations on the Company, including PRC regulations, refer to “Item 1. Business—Government Regulation.” For more information regarding the Company’s cash flows into and out of China, refer to “Item 1. Business—Doing Business in China—Cash Flows.”
The Company respectfully notes that it has only one variable interest entity acquired as part of its acquisition of Daojia, and Daojia, which represents less than 1% of the Company’s total revenue, is immaterial to the Company as a whole. Therefore, the Company does not believe that Chinese regulations pertaining to VIEs represent a material risk to the Company, other than as currently disclosed in the Company’s risk factors on pages 23, 51 and 52 of the Company’s Form 10-K filed on February 28, 2022 (“2021 Form 10-K”), revised and supplemented as discussed in the Company’s response dated October 31, 2022 (the “Prior Response”) to the Staff’s letter dated September 21, 2022 (the “Prior Letter”). Furthermore, the Company has proposed additional disclosure in “Item 1. Business” regarding data security and anti-monopoly risks as noted in response to comment 7 below and as provided in the Prior Response. The Company also notes that the Company currently includes in its 2021 Form 10-K a risk factor relating to Chinese anti-monopoly regulations under the heading “Regulations regarding acquisitions may impose significant regulatory approval and review requirements, which could make it more difficult for us to pursue growth through acquisitions” on page 56 of the 2021 Form 10-K.
2.We note your revised disclosure in response to comment 2. Where you address the August 26, 2022 Statement of Protocol, please further revise to state that the PCAOB will be required to reassess its determinations by the end of 2022.
Company Response:
The Company acknowledges the Staff’s comment and undertakes to revise the referenced disclosure to state that the PCAOB will be required to reassess its determinations by the end of 2022.
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3.We note your response to comment 3 and reissue our comment. The disclosure here should not be qualified by materiality. Provide proposed revised disclosure that includes a clear description of how cash is transferred through your organization. Quantify in that disclosure any cash flows and transfers of other assets by type that have occurred between the holding company and its subsidiaries, and direction of transfer. Quantify any dividends or distributions that a subsidiary has made to the holding company and which entity made such transfer, and their tax consequences. Similarly quantify dividends or distributions made to U.S. investors, the source, and their tax consequences. Your disclosure should make clear if no transfers, dividends, or distributions have been made to date. Provide cross-references to the consolidated financial statements.
Company Response:
The Company proposes to include the following disclosure under the heading “Item 1. Business—Doing Business in China” in future filings:
Cash Flows
Yum China is a Delaware holding company conducting substantially all of its operations in China through its China subsidiaries. Yum China derives substantially all of its revenue through its operations in China, and Yum China indirectly owns, and receives dividends from, its China subsidiaries. In addition, the Company has also generated cash from its global offering in September 2020.
For the year ended December 31, 2021, the Company’s China subsidiaries distributed approximately $411 million in dividends to the Company’s Hong Kong-incorporated holding companies. Dividends paid by China subsidiaries to their direct offshore parent company are subject to Chinese withholding income tax at the rate of 10%, but Hong Kong has a tax arrangement with mainland China that provides for a 5% withholding tax on dividends upon meeting certain conditions and requirements. Once distributed outside of mainland China, the funds are freely transferrable. For the year ended December 31, 2021, the Company’s Hong Kong subsidiaries did not distribute dividends to the Company’s Delaware holding company.
In 2021, Yum China paid cash dividends to stockholders totaling $203 million and repurchased $75 million of its common stock. The source of funds for these dividends and repurchases was cash on hand held outside of mainland China. These dividends to stockholders and repurchases generally had no tax consequence to the Company, but may be taxable (including by way of withholding) to its stockholders. In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed into law in the U.S. The IRA contains certain tax measures, including an excise tax of 1% on net share repurchases that occur after December 31, 2022. For more information on our dividends and share repurchases, see the Consolidated Statements of Cash Flows and Note 16 to the Consolidated Financial Statements in our Form 10-K for the year ended December 31, 2021.
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In addition, Yum China makes investments in its China subsidiaries through capital contributions to further support their operational and growth needs. For the year ended December 31, 2021, one of Yum China’s subsidiaries, which was incorporated in Hong Kong, made capital contributions to the Company’s China subsidiaries totaling approximately $95 million. Cash may also be transferred among the Company’s China subsidiaries and their offshore holding companies by means of intercompany loans. No such intercompany loans were made in 2021.
For more information regarding the Company’s cash flows, see our Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 and the related notes to our Consolidated Financial Statements.
4.We note your response to comment 4 and reissue our comment in part. Please amend your disclosure here and in the summary risk factors and risk factors sections to state that, to the extent cash in the business is in the PRC or a PRC entity, the funds may not be available for other use outside of the PRC, including for distributing dividends to your investors, due to interventions in or the imposition of restrictions and limitations on the ability of you or your subsidiaries by the PRC government to transfer cash. Provide a cross-reference to the other discussions in this section.
Company Response:
The Company refers to the disclosure set forth in response to comment 1 to be included in “Item 1. Business” under the heading “Interventions in or the imposition of restrictions and limitations by the PRC government on currency conversion and payments of foreign currency and RMB out of mainland China may limit our ability to utilize our cash balances effectively, including making funds held by our China-based subsidiaries unavailable for use outside of mainland China, which could limit or eliminate our ability to pay dividends and affect the value of your investment.” The Company also refers to the cross references to the more detailed discussions of risk factors, government regulations and cash flows set forth in response to comment 1 above.
Additionally, the Company undertakes to include a summary of this risk factor under “Risk Factors—Summary of Risk Factors” and to replace the risk factor heading “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” with the above revised heading.
5.We note your response to comments 3 and 5 and reissue comment 5 in part. Move the disclosure under the headings Regulations Relating to Dividend Distribution and Regulations Relating to Taxation on page 18 to a more prominent place in this section. Also include disclosure addressing governmental control of currency conversion and payments of foreign currency and