Yum China, which had a market value of $13.6 billion as of its closing price on Tuesday, was spun off from owner Yum Brands in 2016 and later listed on the New York Stock Exchange. It is the biggest fast-food chain operator in China with over 8,100 restaurants in more than 1,200 cities.

The firm has been discussing internally about switching its listing to the Hong Kong bourse, because of the city's proximity to the Chinese market, potentially higher valuation and its convenient timezone for executives, a separate source with knowledge of the plan told Reuters.

Chinese investment firm Hillhouse Capital Group is planning to lead a consortium to buy the firm, said four of the people, who declined to be identified as they were not authorised to speak to the media.

Hillhouse, which has received commitments of over $10 billion for a new private equity fund, has tapped lenders for potential financing of the deal and other investors to join them in the bid, two of them said. Former Yum China chairman and CEO Sam Su, who was pivotal in the company's expansion in China, now serves as an operating partner at Hillhouse.

Yum China's shares closed up 4 percent at $35.58 on Tuesday.

Global investment house KKR & Co and Hong Kong-based regional firm Baring Private Equity Asia are also weighing whether to invest in the buyout, according to two sources, who added that no final decision has been made.

EARLIER BUYOUT FAILED

Bloomberg first reported on investors in the Yum China buyout on Tuesday. The report said Chinese sovereign fund China Investment Corp (CIC) and DCP Capital, the investment firm run by former KKR & Co senior executives, are part of the Hillhouse consortium, adding that Primavera Capital Group, a current investor in Yum China, could also join the bidding group.

Reuters could not independently verify if CIC and DCP were part of the Hillhouse consortium. A separate source with knowledge of the situation said there could be more than one consortium of bidders.

A spokesman for Yum China said the company does not comment on market rumours or speculation when asked about the potential buyout and the Hong Kong listing plan. Yum Brands did not respond to a request for comment.

Hillhouse and Baring declined to comment. KKR, CIC, DCP and Primavera did not respond to requests for comments.

Chinese investment firm Primavera Capital and Ant Financial Services Group bought a minority stake in Yum China for $460 million as part of the spin-off deal in September 2016. Both are still shareholders in the company. Ant declined to comment.

Two sources said a KKR-led consortium, which included Baring, CIC and Chinese investment firm Hopu Investments, had discussions with Yum Brands! about taking a controlling stake in its China business two years ago but failed to get a deal done, partly due to tax issues.

Yum China shares are down 11 percent this year but its Tuesday's closing price is still above its listing price at $24.51 on Nov. 1 2016. Its stock price shot up temporarily after reports about the potential buyout first came out in late July but has slid back in the last two weeks.

In addition to being the exclusive licencee of the KFC, Pizza Hut and Taco Bell brands in China, Yum China also runs Chinese fast-food chain First East Dawning and hotpot restaurant Little Sheep which it acquired in 2012.

Yum was the first major Western fast-food company to enter China, opening a KFC store in central Beijing in 1987. Parent Yum Brands! currently collects 3 percent of KFC, Taco Bell and Pizza Hut China sales as royalties.

Yum China's second-quarter net income increased 13 percent year-on-year but Pizza Hut continued to face challenges in China's competitive casual dining space, its CEO said on Aug. 1.

Analysts surveyed by Thomson Reuters I/B/E/S estimate Yum China's 2018 net income will rise 6 percent to $598 million.

(Reporting by Kane Wu and Julie Zhu; editing by David Evans and Edwina Gibbs)

By Kane Wu and Julie Zhu