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UPDATE 5-Yum blames South China Sea protests for dip in China sales

(Adds executive comment, details on protests)

By Lisa Baertlein

Oct 6 Yum Brands Inc, owner of KFC and Pizza Hut, blamed tensions over the South China Sea for an unexpected dip in quarterly sales at its established restaurants in China.

The company, which will spin off its China business on Oct. 31, said the last quarter started well there, but its restaurants there were hit by anti-U.S. protests after an international court rejected China's claim to historic rights in the South China Sea.

"If not for this event, we believe the China Division would have delivered its fifth consecutive quarter of positive same-store sales growth," Chief Executive Officer Greg Creed said.

Sales at Yum China restaurants open at least one year fell 1 percent during the third quarter ended on Sept. 3. The protests reduced the measure by as much as 500 basis points, but the impact has largely eased, executives said on a conference call on Thursday.

Analysts polled by research firm Consensus Metrix had expected a 4.1 percent sales gain for the China unit, which is Yum's top profit generator.

An international tribunal in the Hague said in July it found no legal basis for China's claim to most of the South China Sea. This prompted local media to call the court a "puppet" of external forces and accuse the United States of turning the Philippines, which filed the case, against China.

Several brands were caught up in short-lived anti-U.S. protests and calls for a boycott, including Apple Inc and KFC, which has more than 5,000 restaurants across China.

Some analysts questioned the extent of the impact of the sporadic protests in China, where Yum is also battling tough competition, lingering effects of food safety missteps and a weak economy.

"We estimate sales dropped 15 to 25 percent in some of the cities because a lot of the protestors were looking for a big American brand to attack, to protest against," said Shaun Rein, managing director of Shanghai-based China Market Research Group. "So they did have to shut a lot of stores in Northeast China.

"The big challenge for them is, will there be lingering anti-American sentiment?"

Yum's China business will begin trading as a separate company on Nov. 1 on the New York Stock Exchange under the ticker symbol YUMC.

Chinese investment firm Primavera Capital and an affiliate of Alibaba Group Holding Ltd said in September they would buy a stake in Yum China for $460 million. (Reporting by Lisa Baertlein in Los Angeles; Additional reporting by Donny Kwok in Hong Kong; Editing by Muralikumar Anantharaman and Lisa Von Ahn)

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